As recently reported, The US Securities and Exchange Commission (SEC) plans to take legal action against the Paxos Trust Company in connection with Binance USD (BUSD) leaving many in the community wondering how the regulator could consider a stablecoin as a security.
Blockchain lawyers told Cointelegraph that, While the answer is not black and white, there is an argument for it if the stablecoin was issued with the expectation of profit or they are derivatives of securities.
A report in The Wall Street Journal on February 12 revealed that The SEC plans to sue Paxos Trust Company in connection with its issuance of Binance USD, a stablecoin it created in partnership with Binance in 2019. Within the notice, the SEC allegedly alleges that BUSD is an unregistered security.
don’t hate me but custodial stablecoins are probably all securities
I have said this consistently
US securities laws are just insanely broad…https://t.co/JDsB0v93Sw
— _gabrielShapir0 (@lex_node) February 13, 2023
don’t hate me, but the custodial stablecoins are probably all securities. I have said this constantly. US securities laws are incredibly broad…
Aaron Lane, a senior professor at RMIT’s Blockchain Innovation Hub, told Cointelegraph that, While the SEC may claim that these stablecoins are securities, that proposition has not been conclusively proven by US courts:
“With stablecoins, a particularly contentious question will be whether the investment in the stablecoin led a person to an expectation of profit (the “third arm” of the Howey test).”
“From a strict point of view, the idea of the stablecoin is that it is stable. From a broader point of view, it could be argued that arbitrage, hedging and staking opportunities offer an expectation of profit,” he said.
Lane also explained that A stablecoin could be subject to US securities law if it were considered a derivative of a security.
This is something that SEC Chairman Gary Gensler strongly emphasized in a speech delivered in July 2021. before the Derivatives and Futures Law Committee of the American Bar Association:
“Make no mistake: it doesn’t matter if it’s an equity token, security-backed stablecoin token, or any other virtual product that provides synthetic exposure to underlying securities.”
“These platforms – whether in the decentralized or centralized finance space – are bound by securities laws and must work within our securities regime,” he said. at that moment.
However, Lane stressed that, Ultimately, each case will “stand on its own facts,” especially when it involves an algorithmic stablecoin rather than a cryptocurrency or collateralized fiat currency.
A recent post by Quinn Emanuel Trial Lawyers has also addressed the issue, explaining that to “bring” stablecoins to a “stable value”, they can sometimes be offered at a discount before they stabilize sufficiently.
“These sales may support the argument that initial buyers, despite formal disclaimers from issuers and buyers alike, are buying with the intent to resell after stabilization at the higher price,” he wrote.
But while stablecoin issuers can go to court to decide the dispute, many believe the SEC’s “tight regulation” approach is misguided.
Digital asset lawyer and partner of Piper Alderman, Michael Bacina, told Cointelegraph that the SEC should provide “sensible guidance” to help industry players seeking to comply with the law:
“Strong regulation is an ineffective way to achieve political results, as SEC Commissioner Peirce has recently observed in her dissent regarding the Kraken prosecution. When a rapidly growing industry does not fit into the existing regulatory framework and has been looking for clear pathways to compliance, commitment and sensible guidance is a far superior approach to resorting to lawsuits.”
Cinneamhain Ventures partner Adam Cochran gave another take to his 181,000 Twitter followers on February 13, noting that the SEC can sue any company that issues financial assets under the much broader Securities Act of 1933:
1/5
This is what people don’t realize.
Howey test = precedent for investment contracts.
“Securities” is a much broader category defined by the 1933 Securities Act.
Honestly, if the SEC wants to, with how vague the act is, it’s fairly easy to put anything under it. https://t.co/TbHKqO3zLD
—Adam Cochran (adamscochran.eth) (@adamscochran) February 13, 2023
1/5 This is what people don’t realize. Howey test = precedent for investment contracts. “Securities” is a much broader category defined by the Securities Act of 1933. Honestly, if the SEC wants to, with how vague the law is, it’s pretty easy to include anything in it.
The digital asset investor then explained that the SEC is not limited to the Howey test:
“The fact that these assets hold underlying treasure makes them much like a money market fund, exposing holders to a security even if they don’t gain from it. Arguing (I don’t agree, but it’s quite reasonable) that they can be a value.”
“It’s worth fighting tooth and nail, but anyone who shrugs that ‘lol the SEC got it wrong, this doesn’t pass the Howey test’ needs to re-evaluate. Oddly enough, the SEC is counting on expert securities advisors,” he added.
The SEC’s latest planned action comes after reports surfaced on February 10 that the Paxos Trust was under investigation by the New York Department of Financial Services for an unconfirmed reason.
Commenting on the initial reports, a Binance spokesperson said that BUSD is a “product issued and owned by Paxos”, and that Binance licenses its brand to the company for use with BUSD. He added that Paxos is regulated by the New York Department of Financial Services (NYDFS) and that BUSD is a “1 to 1 backed stablecoin”.
“Stablecoins are a critical safety net for investors seeking refuge from volatile markets, and limiting their access would directly harm millions of people around the world,” the spokesperson added. “We will continue to monitor the situation. Our global users have a wide range of stablecoins at their disposal.”
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