Are stablecoins securities? Well, its not so simple, say lawyers

A planned enforcement action against Paxos by the US Securities and Exchange Commission (SEC) regarding Binance USD (BUSD) was recently reported. Many in the community are wondering how a regulator can treat a stablecoin as a security.

Blockchain lawyers told Cryptooshala that while the answer is not black and white, there is an argument that the stablecoin was issued for profit or is a derivative of securities.

A Wall Street Journal report on Feb. 12 reported that the SEC plans to sue Paxos Trust Company over its issuance of Binance USD, a stablecoin it created in partnership with Binance in 2019. In the notice, the SEC states that BUSD is an unregistered security.

Senior Lecturer Dr. Aaron Lane of RMIT’s Center for Blockchain Innovation told Cryptooshala that while the SEC may argue that these stablecoins are securities, the proposal has not been conclusively tested by US courts:

“With stablecoins, it will be especially controversial whether investment in a stablecoin has led a person to expect profit (the “third arm” of the Howey test).”

“From a narrow perspective, the whole idea of ​​a stablecoin is that it is stable. More broadly, it can be argued that arbitrage, hedging and betting opportunities provide an expectation of profit,” he said.

Lane also explained that a stablecoin could be subject to US securities laws if it is found to be a derivative of a security.

This is what SEC Chairman Gary Gensler emphasized emphatically in July 2021 in his speech before the American Bar Association Committee on Derivatives and Futures Law:

“Make no mistake: It doesn’t matter if it’s a stock token, a value-stable token backed by securities, or any other virtual product that provides synthetic exposure to the underlying security.”

“These platforms — whether in the decentralized or centralized financial space — are subject to securities laws and must operate under our securities regime,” he said at the time.

However, Lane emphasized that ultimately each case “will be based on its own facts,” especially when deciding on an algorithmic stablecoin rather than a crypto or fiat-backed one.

Recent mail Quinn Emanuel Trial Lawyers also approached this issue, explaining that in order to “build up” stablecoins to a “stable value”, they can sometimes be offered at a discount until they stabilize enough.

“These sales may support the argument that the original buyers, despite formal disclaimers by both issuers and buyers, are buying with the intent to resell after stabilization at a higher price,” the release said.

Are stablecoins securities? Legal analysis from Quinn Emanuel Trial Lawyers. Source. Quinn Emanuel.

But while stablecoin issuers can go to court to resolve the dispute, many feel that the SEC’s “regulation through enforcement” approach is simply inappropriate.

Digital asset lawyer and partner Michael Bachina of Piper Alderman told Cryptooshala that the SEC should instead provide “sound guidance” to help industry players who seek legal compliance:

“Regulation through enforcement is not an effective way to achieve political results, as SEC Commissioner Pierce recently noted in her strong opposition to the prosecution of Kraken. When a fast-growing industry does not comply with the existing regulatory framework and is looking for clear paths to compliance, then communication and sound leadership is a much better approach than resorting to legal action.”

Cinneamhain Ventures partner Adam Cochran shared a different view with his 181,000 Twitter followers on Feb. 13, noting that the SEC can sue any company that issues financial assets under the much broader Securities Act of 1933:

The digital asset investor then explained that the SEC is not limited to the Howey test:

“The fact that these assets contain underlying Treasury bills makes them very similar to a money market fund, providing securities to holders even if they don’t make money from it. The argument (not the one with which I agree, but reasonable enough) that they can be a security.

“This is worth fighting tooth and nail, but anyone shrugging their shoulders and saying, ‘Laughs, the SEC made a mistake, this doesn’t pass the Howey test,’ needs to be reassessed. Believe it or not, the SEC has a knowledgeable securities advisor,” he added.

SEC chairman compares stablecoins to casino poker chips

The latest announcement of planned action by the SEC comes after reports emerged on Feb. 10 that Paxos Trust was under investigation by the New York City Department of Financial Services for an unconfirmed cause.

Commenting on initial reports, a Binance spokesperson stated that BUSD is “a product issued and owned by Paxos” and Binance is licensing its brand to the firm for use with BUSD. He added that Paxos is regulated by the New York City Department of Financial Services (NYDFS) and that BUSD is a “1:1 backed stablecoin.”

“Stablecoins are a critical safety net for investors seeking a safe haven from volatile markets, and restricting their access would directly harm millions of people around the world,” the spokesperson added. “We will continue to monitor the situation. A wide range of stablecoins are available to our global users.”

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