The recently reported enforcement action against Paxos by the United States Securities and Exchange Commission (SEC) over Binance USD (BUSD) has raised many questions in the public about how the regulator can view the stablecoin as a security.
Blockchain lawyers told Cointelegraph that the answer is not black and white, there are arguments that stablecoins are issued with the expectation of profit or as derivatives of securities.
A report from the Wall Street Journal on February 12 said that the SEC plans to sue Paxos Trust Company in connection with the issuance of Binance USD, a stablecoin created in partnership with Binance in 2019. In the news, the SEC reportedly sued. that BUSD is an unregistered security.
don’t hate me but custodian stablecoins are probably all securities
I’ve said this over and over
US securities laws are just too broad …https://t.co/JDsB0v93Sw
— _gabrielShapir0 (@lex_node) February 13, 2023
Senior Lecturer Dr. Aaron Lane of RMIT’s Blockchain Innovation Hub told Cointelegraph that while the SEC may claim these stablecoins are securities, the proposition has yet to be conclusively tested by US Courts:
“With stablecoins, the most controversial issue is whether investing in stablecoins leads people to profit expectations (the ‘third arm’ of the Howey test).”
“In a narrow view, the whole idea of a stablecoin is stability. In a broader view, it can be said that arbitrage, hedging, and staking opportunities provide the expectation of profit,” he said.
Lane also explained that stablecoins may come under US securities laws if they are found to be derivatives of securities.
This is something SEC Chairman Gary Gensler emphasized in July 2021 in a speech to the American Bar Association’s Derivatives and Futures Law Committee:
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or another virtual product that provides synthetic exposure to the underlying securities.”
“These platforms – whether in the decentralized or centralized financial space – are linked to securities laws and must work in our securities regime,” he said at the time.
But Lane emphasized that ultimately each case “will turn on its own facts,” especially when judging an algorithmic stablecoin versus a crypto or fiat-collateralized one.
A recent post by Quinn Emanuel Trial Lawyers has also approached the subject, explaining that to “ramp up” stablecoins to a “stable value,” sometimes they can be offered a discount before it is stable enough.
“The sale may support the argument that early buyers, despite official objections by issuers and buyers, bought with the intention of reselling after stabilization at a higher price,” it wrote.
But while stablecoin issuers can use the courts to resolve these disputes, many believe the SEC’s “regulation by enforcement” approach is simply not desirable.
Digital asset attorney and partner Michael Bacina of Piper Alderman told Cointelegraph that the SEC should provide “sensible guidance” to help industry players seeking legal compliance:
“Regulation with enforcement is an inefficient way to achieve policy results, as SEC Commissioner Peirce recently observed regarding the disagreement over Kraken’s lawsuit. When a rapidly growing industry does not fit into the existing regulatory framework and has sought a clear path to compliance, then engagement and thoughtful guidance is a superior approach to using lawsuits.
Cinneamhain Ventures partner Adam Cochran offered another view to his 181,000 Twitter followers on February 13, stating that the SEC can sue any company that issues financial assets under the broader Securities Act of 1933:
1/5
This is what people don’t understand.
Howey test = precedent for investment contracts.
“Securities” is a broader category defined by the Securities Act of 1933.
To be honest, if the SEC wants to, with the vagueness of the action, it’s pretty easy to drop something. https://t.co/TbHKqO3zLD
— Adam Cochran (adamscochran.eth) (@adamscochran) February 13, 2023
The digital asset investor then explained that the SEC is not limited by the Howey Test:
“The fact that these assets have underlying treasuries, makes them like money market funds, providing security to the holders, even if they do not make money. Make an argument (not that I agree with, but it is quite reasonable) that it can be a security.
“It’s really fighting tooth and nail, but everyone who dismisses this as “lol the SEC is wrong, this doesn’t pass the Howey test” needs to be re-evaluated. The SEC, believe it or not, has securities advisors who know,” he said.
related: SEC chair compares stablecoins to casino poker chips
The SEC’s latest planned action comes after reports emerged on February 10 that Paxos Trust is being investigated by the New York Department of Financial Services for unconfirmed reasons.
Commenting on the initial report, a Binance spokesperson said that BUSD is a “Paxos-published and owned product” with Binance licensing the brand to the company for use with BUSD. It added that Paxos is regulated by the New York Department of Financial Services (NYDFS) and BUSD as a “1 to 1 backed stablecoin.”
“Stablecoins are a critical safety net for investors seeking protection from volatile markets and limiting access will directly harm millions of people around the globe,” the spokesperson said. “We will continue to monitor the situation. Our global users have a variety of stablecoins available to them.”