The US SEC finally let Paxos go, has BUSD become a victim of policy struggle?

On July 11, local time in the United States, after a year-long investigation, the U.S. Securities and Exchange Commission (SEC) decided to end its investigation into Paxos Trust Company related to the Binance USD (BUSD) stablecoin. Paxos received a formal cease and desist letter from the SEC saying it would not recommend enforcement action against the company. The news marks a major victory for Paxos in its legal dispute related to the Binance USD (BUSD) stablecoin.

Background: SEC’s Wells notice caused BUSD with a market value of 20 billion to gradually fade away

What kind of company is Paxos?

Paxos is a blockchain infrastructure and tokenization platform that works with major enterprises around the world for asset tokenization, custody and trading. Partners include PayPal, Interactive Brokers, Mastercard, FreeMarket and Nubank, among others, and it issues numerous regulated digital assets including PayPal USD (PYUSD), Pax Dollar (USDP) and Pax Gold (PAXG). Its affiliate, Paxos International, issues the income-generating regulated stablecoin Lift Dollar (USDL).

Paxos is regulated in the United States by the New York Department of Financial Services (NYDFS), the Monetary Authority of Singapore (MAS), and the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market. Paxos is a top-funded fintech company that has raised over $540 million from leading investors including Oak HC/FT, Declaration Partners, Founders Fund, Mithril Capital, and PayPal Ventures.

How are things developing?

Binance and Paxos announced their cooperation to launch BUSD in 2019. Subsequently, BUSD quickly climbed to the third largest stablecoin status after USDT and USDC. ItBit, a digital asset exchange operated by Binance and Paxos, has listed BUSD, as well as many other well-known exchanges.

In February 2023, Paxos received a Wells Notice from the SEC stating that the regulator planned to sue Paxos for violating investor protection laws, claiming that BUSD was an unregistered security. That same month, the Department of Financial Services (DFS) ordered Paxos to stop minting BUSD due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance.” At its peak, BUSD had a market capitalization of over $20 billion.

Subsequently, because BUSD could no longer be issued, BUSD’s status was gradually replaced by FDUSD issued by the Hong Kong company FD 121 Limited, which is affiliated with First Digital Limited, a financial company headquartered in Hong Kong. Since its inception in June 2023, FDUSD has stabilized at fourth place in the market value of stablecoins. Coingecko data shows that the current market value is approximately US$1.898 billion, second only to USDe. The market value of BUSD has fallen to outside the 20th place.

Paxos received a formal termination notice from the SEC on Tuesday, which made it clear that the SEC would not recommend enforcement action against Paxos in the BUSD investigation.

SEC Notice of Official Termination of Investigation. Source: Cointelegraph

Paxos response: BUSD is not a security

The following is the full text of Paxos’ response:

Paxos Trust has always maintained that its U.S. dollar-backed stablecoin is not a security under the federal securities laws and that the Wells Notice is unreasonable and unfair. We are proud of our ongoing advocacy for stable value digital assets and the SEC staff’s decision not to pursue enforcement action against Paxos regarding BUSD.

We believe this development will usher in a new wave of stablecoin adoption by leading global companies. Well-designed stablecoins with strong consumer protections like those issued by Paxos will revolutionize the financial system in use cases such as payments, settlements, and remittances. This transformative technology will make the financial system more stable, accessible and transparent.

Paxos has always prioritized the security of customer assets. Stablecoins issued by Paxos are always backed 1:1 by USD-denominated reserves, fully segregated and held in bankruptcy segregated accounts. Paxos is unique in driving significant innovation in the global financial system as the only issuer to ensure regulatory oversight to launch secure solutions.

Are stablecoins securities? Why did the SEC stop its investigation?

In the lawsuit filed by the SEC against Binance last year, the SEC believed that BUSD was a security, that is, the efforts of others made this asset appreciate, but the opinions of each party were very different. Rep. Maxine Waters of California and Rep. Patrick McHenry of North Carolina have been working on a bill, but one challenge is who should be the primary regulator for stablecoin issuers, The Block reports. The Senate is also working on a bill to regulate stablecoins.

SEC Chairman Gary Gensler has previously compared stablecoins to money market funds and other securities, adding: “Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; maintain value What is the mechanism; or how these tokens are issued, sold and used in the crypto ecosystem, they may be shares of a money market fund or another type of security. "

An SEC spokesperson said that the SEC is not responsible for the possible existence. to comment on the investigation.

Also, it’s worth mentioning that the SEC’s decision to terminate the investigation comes after a series of court rulings that went against the agency. In July 2023, a federal judge ruled in SEC v. Ripple that XRP tokens are not securities in programmatic sales on digital asset exchanges. In June 2024, the judge in SEC v. Binance cited the Ripple ruling when dismissing BUSD-related claims, ruling that BUSD was not a security.

These court rulings cause the SEC to re-evaluate its stance on Paxos and BUSD. At the same time, the US Department of Justice has settled with Binance, which makes the intention of further putting pressure on Binance through BUSD meaningless. But at the same time, the SEC is still in litigation mode against crypto companies including Ripple, Binance, Kraken, and Coinbase.

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