This morning, stablecoin issuer Paxos will face lawsuits from the U.S. Securities and Exchange Commission (SEC) over BUSD-related issues, according to people familiar with the matter. SEC enforcement officers have issued a "Wells notice" to Paxos informing them of possible enforcement actions. The SEC said Paxos issued and listed BUSD as an unregistered security and plans to sue Paxos for violating investor protection laws and may take enforcement action.
The "Wells Notice" is an informal reminder issued by the US SEC before civil proceedings against listed companies in the United States. Listed companies that have received the notice can communicate and negotiate with the SEC before receiving a formal lawsuit. John Reed Stark, former director of the US SEC's Office of Internet Enforcement, tweeted, "In my 18 years with SEC Enforcement, I can't recall a single instance in which I issued a Wells Notice without enforcement action. SEC's Encryption Action Continues .”
A Paxos spokesman declined to comment, and the SEC did not respond to a request for comment. “BUSD is issued and owned by Paxos, which only licenses its brand. We will continue to monitor the situation,” Binance said in a statement.
As previously reported, the New York State Department of Financial Services (NYDFS) is investigating Paxos, the issuer of Pax Dollar (USDP) and Binance USD (BUSD) stablecoins, the scope of which is unclear. A NYDFS spokesman said the agency was unable to comment on ongoing investigations.
Unlike the SEC v. Ripple case that has lasted for several years, the token that is rumored to be identified as a security is different from XRP. Its price does not fluctuate a lot, but it is BUSD anchored to the US dollar.
This also made the market wonder, why can stablecoins be recognized as securities?
secondary title
Cryptocurrencies VS. Securities in Regulatory Eyes
When it comes to "Securities", it is natural to start with a clear concept. The Securities Act of 1933 was the first federal law in the United States to regulate the offering and sale of securities. It was initially implemented by the Federal Trade Commission, and then the SEC was established, and this act has also become the main basis for the SEC's enforcement. The Act stipulates that any securities must be registered with the SEC, except in cases where they are partially exempt.
In this law, the concept of securities is also clarified. The first paragraph of Article 2 of the Securities Law stipulates:
The term "Securities" means any notes, shares, treasury shares, bonds, debentures, certificates of indebtedness, certificates of interest or participation under profit-sharing agreements, certificates of credit secured by securities, pre-formation certificates or subscriptions, Transferable shares, investment contracts, equity trust certificates, securities deposit certificates, oil, gas or other mineral small interest rollover rights, or in general, any interest and instrument generally recognized as "securities", or any of the above Certificate of interest in or participation in securities, provisional or provisional certificate, receipt, certificate of guarantee, or warrant or right to order or purchase.
Obviously, it is difficult for cryptocurrencies using emerging encryption technologies to be clearly classified as one of the above-mentioned multiple products.
However, many judicial disputes between SEC and encryption companies still appear.
Because, in the connotation of securitiesIncluding the more flexible type of "investment contract",secondary title
The Howey Test: The SEC's Main Weapon in Punching Crypto
In Florida in the last century, William Howey established the WJ Howey Company and the Howey-in-the-Hills Service Company, through which he developed a novel product. The WJ Howey Company purchased a citrus grove in Florida and subdivided the citrus grove land into smaller parcels to sell to investors. He promised that investors could lease the land to the Howey-in-the-Hills Service, which would operate and tend the citrus groves, and investors would be able to reap the benefits of the citrus groves without engaging in any farming.
The SEC considered the investment contract to be a security, and Howey had violated securities laws by not filing any registration statement with the SEC for this particular land product.
In 1946, the SEC sued the WJ Howey Company. Ultimately, following a lengthy judicial process, the U.S. Supreme Court ruled that land sales and service contracts qualify as “investment contracts” under the Securities Act, meaning that these contracts can be deemed securities. This is an important case in determining the general applicability of the federal securities laws.
The case led to and spawned the concept of the Howey test, which is used to determine whether certain investment products should be considered securities. An "investment contract," according to the SEC, is an investment of funds in an ordinary business with the reasonable expectation of profiting from the efforts of others.
Specifically, the Howey test consists of four elements:
1. Invest funds;
2. In a common cause;
3. Reasonable expectations for profits;
4. Efforts from others.
And the Howey test applies to any contract, scheme, or transaction, whether or not it is characteristic of a security.
It is based on this that a large number of cryptocurrencies are involved in the category of "investment contracts" in securities, and a lengthy judicial dispute has occurred with the SEC.In the lengthy SEC v. Ripple case, the SEC defined XRP as a security based on this principle.
In July 2022, the SEC will recognize AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, KROM as securities.(Note: PANews reported on The Block in July 2022 that the US SEC listed the above nine cryptocurrencies in the “Coinbase insider trading” incident as securities.)
In November 2022, the federal court of New Hampshire, USA issued a judgment, identifying LBRY as a security based on the Howey test, and ruled in favor of the SEC in the case of SEC v. LBRY(Odaily note: LBRY, an encryption start-up company, once sold "LBRY Credits" to raise 11 million US dollars, has not conducted ICO,secondary title。）
How do stablecoins become securities?
However, unlike XRP and other cryptocurrencies previously targeted by the SEC, BUSD is a stablecoin whose price is anchored to the US dollar. Investors do not have any profit expectations when buying this "product". The product barely passes any of the Howey tests, so how does it qualify as a security?
At present, the SEC has not taken any formal action against Paxos, nor has it disclosed any documents. Odaily’s guess is:
It needs to be clear that the Howey test is only a standard for judging the category of "investment contracts" in the securities law. In addition, financial securities that we are more familiar with, such as bonds, bills, and mortgage trust certificates, are included. in it.
Going back to BUSD, Paxos’ January 2023 reserve report reveals that,The BUSD reserve consists of two product classes: U.S. Treasuries, U.S. Treasuries Repurchase Agreements (overnight maturities and overcollateralized)。
This holding structure makes it more like a money market fund, that is, users of BUSD are indirectly holding bonds (a class of securities). We can speculate that this may be why the SEC has identified BUSD as a security.
However, although users who hold BUSD bought money market fund-like products (BUSD), they did not benefit from it.
The big stick of SEC sanctions is ready to go, but its impact has not yet been reflected in the market (BUSD has not broken the anchor, BNB is solid in today's overall downward market).
According to Nansen data, BUSD currently has a total market value of $16 billion, ranking third among stablecoins. About 90% ($14.4 billion) of BUSD is held by Binance addresses. Among them, in the past 7 days, the net outflow of Binance exceeded 81.4 million BUSD. In addition, an address in Jump Trading has net withdrawn 57.8 million BUSD from the exchange in the past 7 days, and the address still holds 18.8 million BUSD.
