The US SEC finally let Paxos go. Has BUSD become a victim of the policy struggle?

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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 and the Binance USD (BUSD) stablecoin. Paxos received a formal termination notice from the SEC stating that it would not recommend enforcement action against the company. This news marks a major victory for Paxos in the 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 is Paxos?

Paxos is a blockchain infrastructure and tokenization platform that works with major global companies to tokenize, custody and trade assets. Partners include PayPal, Interactive Brokers, Mastercard, Free Market and Nubank, and it has issued a number of regulated digital assets including PayPal USD (PYUSD), Pax Dollar (USDP) and Pax Gold (PAXG). Its affiliate Paxos International issues the yield-based regulated stablecoin Lift Dollar (USDL).

Paxos is regulated in the U.S. 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, having raised over $540 million from leading investors including Oak HC/FT, Declaration Partners, Founders Fund, Mithril Capital, and PayPal Ventures.

How did things develop?

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

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. In the same month, the Department of Financial Services (DFS) ordered Paxos to stop minting BUSD due to several unresolved issues related to Paxoss oversight of its relationship with Binance. At its peak, BUSD had a market value of over $20 billion.

Subsequently, as BUSD could no longer be issued, BUSD was gradually replaced by FDUSD issued by Hong Kong company FD 121 Limited, which is affiliated with Hong Kong-based financial company First Digital Limited. Since its launch in June 2023, FDUSD has been ranked fourth in the stablecoin market value. According to Coingecko data, the current market value is about US$1.898 billion, second only to USDe. The market value of BUSD has fallen outside the top 20.

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

SEC formally notifies of termination of investigation. Source: Cointelegraph

Paxos responds: BUSD is not a security

Here is Paxos’ full response:

“Paxos Trust Company has consistently 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 unjust. We are proud of our ongoing advocacy for stable value digital assets and the SEC staff’s decision not to pursue an enforcement action against Paxos regarding BUSD.

“We believe this development will unlock a new wave of stablecoin adoption by leading global companies. Well-designed stablecoins like those issued by Paxos, with strong consumer protections, will transform the financial system across 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 its customers’ assets. Paxos-issued stablecoins are always backed 1:1 by USD-denominated reserves, fully segregated and held in bankruptcy-remote accounts. As the only issuer to ensure regulatory oversight to launch a secure solution, Paxos is uniquely positioned to drive significant innovation in the global financial system.”

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 the asset appreciate, but the views of the parties were very different. According to The Block, Representative Maxine Waters of California and Representative Patrick McHenry of North Carolina have been working on a bill, but one of the challenges is who should be the main regulator of stablecoin issuers. The Senate is also working on a stablecoin regulatory bill.

SEC Chairman Gary Gensler has previously likened 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; what the mechanisms are for maintaining value; or how these tokens are issued, sold, and used in the crypto ecosystem, they could be shares of a money market fund or another type of security.”

An SEC spokesman said the agency does not comment on possible investigations.

In addition, it is worth mentioning that the SECs decision to terminate the investigation came after a series of court rulings that were unfavorable to the agency. In July 2023, a federal judge ruled in SEC v. Ripple that XRP tokens were not securities in programmatic sales on digital asset exchanges. In June 2024, the judge in charge of the SEC v. Binance case cited the Ripple ruling when dismissing the charges related to BUSD, ruling that BUSD was not a security.

These court rulings have caused the SEC to reevaluate its stance on Paxos and BUSD. At the same time, the U.S. Department of Justice has settled with Binance, a factor that makes the intention to further pressure Binance through BUSD meaningless. But at the same time, the SEC is still in litigation against crypto companies including Ripple, Binance, Kraken and Coinbase.

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