Is the SEC’s action against BUSD more about Binance than stablecoins?

The Binance-branded stablecoin, Binance USD (BUSD), is a dollar-backed stablecoin issued by blockchain infrastructure platform Paxos Trust Company, and is the third largest stablecoin after Tether’s (USDT) and Circle’s USD Coin (USDC).

Paxos has previously claimed that BUSD is fully backed by reserves held in either fiat cash or US Treasury bills. BUSD was reportedly authorized and regulated by the New York State Department of Financial Services (NYDFS).

Paxos partnered with the crypto exchange Binance in 2019 and launched the stablecoin, which received approval from the NYDFS. Binance CEO Changpeng Zhao has stated that the exchange licensed the Binance brand to Paxos, and BUSD is “fully owned and managed by Paxos.”

However, on February 12 the US Securities and Exchange Commission (SEC) issued a Wells notice to Paxos – a letter the regulator uses to inform companies of planned enforcement actions. The notice alleged that BUSD is an unregistered security. After receiving a Wells notice, the accused is given 30 days to respond via a legal brief known as a Wells filing — a chance to argue why charges should not be brought against the potential defendant.

A day later, the NYDFS ordered Paxos to stop minting new BUSD, citing specific unresolved issues surrounding Paxos’ oversight of its relationship with Binance regarding BUSD. Paxos subsequently decided to cut ties with Binance due to regulatory scrutiny, and said it is working with the SEC to resolve the issue constructively.

Binance, on the other hand, hopes the SEC will not file an enforcement action based on the BUSD saga, telling Cointelegraph:

“The US SEC will hopefully not file an enforcement action on this subject. Doing so is not justified by the facts or the law. Furthermore, it would undermine the growth and innovation of the US fintech sector.”

Paxos declined to comment on the matter, citing ongoing talks with the SEC. The company sent Cointelegraph an internal email with Paxos founder Charles Cascarilla that reiterated its previous stance that BUSD is not a security.

The Cascarilla statement noted that the precedents used to identify securities in the United States are known as the Howey test and the Reves test. He stated that BUSD does not meet the criteria to be a security:

“Our stablecoins are always backed by cash and equivalents – dollars and US Treasury bills, but never securities. We are engaged in constructive discussions with the SEC, and we look forward to continuing that dialogue privately. If necessary, we will of course defend our position in legal proceedings. We will share more information when we can.”

Tether – issuer of the largest stablecoin by market capitalization – did not directly respond to specific questions about stablecoins being classified as securities. However, a spokesperson from the firm told Cointelegraph that “Tether has a good relationship with law enforcement globally and is committed to operating securely and transparently in compliance with all applicable laws and regulations.”

Are stablecoins the focus or are there bigger fish to fry?

Many members of the crypto community were confused by allegations that BUSD was a security, and to see enforcement action against it. This is because BUSD is “stable”, maintaining a 1:1 peg to the US dollar, limiting its use for speculation.

Just days after the SEC action against BUSD, rumors began to circulate that a similar Wells notice was sent to other stablecoin issuers, including Circle and Tether. Circle’s chief strategy officer, Dante Disparte, denied such rumors and said the stablecoin issuer had not received such a document.

Speaking to Cointelegraph earlier this month, some legal experts explained how stablecoins can be considered securities. Although stablecoins are meant to be stable, Aaron Lane, senior lecturer at RMIT’s Blockchain Innovation Hub, said buyers can take advantage of various arbitrage, hedging and staking opportunities.

He further explained that while the answer is not obvious, a case can be made as to whether the stablecoin was developed to produce money or is a derivative of a security.

Some members of the crypto community have tired that the issue may not be just about stablecoins as much as it is about Binance, indicating that the SEC did not take action against Paxos’ gold-backed stablecoin called Pax Gold (PAXG.)

Carol Goforth, a university professor and Clayton N. Little Professor of Law at the University of Arkansas, told Cointelegraph that the problem may be more about Binance than the stablecoin itself:

“There are unique issues with that particular crypto asset because of its ties to and relationship with Binance. It’s possible that some of these unusual characteristics are what the SEC is focusing on, but because part of it is a lack of transparency and accuracy in reported information.”

Goforth added that the price of stablecoins is designed to be stable, which seems to be the antithesis of an expectation of profit.

Nevertheless, “I can see a potential argument that stablecoins make fast transactions in other forms of crypto possible, and this is actually the biggest use of stablecoins to date, accounting for a disproportionately high trading volume compared to market capitalization” Goforth said , that says:

“Profit” could be argued to include the additional value gained from the ability to make such trades, although that seems to be a bit of a stretch. (Expectation of profit is important because it is one of the elements of the Howey investment contract test).

Just weeks after enforcement action against BUSD, the SEC filed a motion to block final approval of Binance.US’s $1 billion bid for assets belonging to bankrupt crypto-lending company Voyager Digital. The SEC flagged the potential sale of Voyager Token (VGX), issued by Voyager, which “may constitute the unregistered offer or sale of securities under federal law.”

The series of enforcement actions by the SEC against various aspects of Binance’s operations led many to believe that the regulator was going after the exchange rather than the stablecoin industry.

SEC’s jurisdiction under question

Amidst the ongoing increase in enforcement actions in the crypto market, the SEC’s jurisdiction has also been questioned, particularly regarding stablecoins. In a recent interview, Jeremy Allaire, CEO of USDC issuer Circle, said that “stable coins” are payment systems, not securities.

Allaire argued that the SEC is not the appropriate regulator for stablecoins and said, “there is a reason why everywhere in the world, including the United States, the government specifically says that payment stablecoins are a payment system and banking regulator activity.”

Coinbase – the first publicly traded crypto exchange on the Nasdaq – is fighting its own securities battle related to its investment products. It also questioned the SEC’s decision to get involved with stablecoins and claim they are securities.

2022 was a disastrous year for the crypto industry as most crypto assets lost more than 70% of their valuation from their market highs. Outside of the crypto winter, the collapse of crypto lending giants, exchanges and asset funds became a more significant concern. Many then questioned regulators for failing to ensure investor safety and enforce regulations. In 2023, the tables have turned, with regulatory agencies coming full force against crypto firms. However, their approach and intentions are being called into question now that they have started.