SEC gives up on proving BUSD is a security

According to a letter from the SEC’s enforcement division shared with Fortune, the agency’s investigation into Paxos regarding its Binance-branded stablecoin BUSD has concluded. Following a legal setback in the US District Court for the District of Columbia regarding the SEC’s claim that Binance conducted unregistered securities offerings of BUSD, Paxos has claimed victory.

“The SEC staff determined it will not bring enforcement action against Paxos in connection with BUSD,” said Paxos in a press release. The SEC followed its customary Glomar response to media questions, telling Fortune simply that “the SEC does not comment on the existence or nonexistence of a possible investigation.”

If the SEC chooses to not sue Paxos over its BUSD relationship with Binance, which seems likely, that victory was foreseeable since June 28, 2024. On that date, a senior judge of the US District Court for the District of Columbia dismissed the SEC’s complaint that Binance sold BUSD as an unregistered security.

NYDFS ordered Paxos to stop minting BUSD

In early 2013, the crypto industry learned that Paxos had received a Wells Notice from the SEC regarding, among other things, BUSD. A Wells Notice is a formal letter that provides prospective defendants of a civil lawsuit to provide one last argument as to why the enforcement division should not recommend that Commissioners sue them for violating the law.

The existence of that SEC Wells Notice was enough to trigger state-level action against Binance. In early February 2023, the New York Department of Financial Services ordered Binance’s stablecoin partner Paxos to stop minting BUSD. By February 21, Paxos had terminated its relationship with Binance for its branded stablecoin.

Binance moved on to other stablecoins, and Tether’s (USDT) dominance continued to rise. Nevertheless, the question loomed over BUSD. Did Binance really offer BUSD in unregistered securities offerings?

How BUSD could have been (but probably isn’t) a security

Protos covered the SEC’s original theory of how Binance sold BUSD, an ostensibly $1-pegged stablecoin, as part of a larger scheme involving the promise of profits. According to the Howey Test approved by the US Supreme Court and reaffirmed by lower courts for decades, when someone seeks to use the money of others on the promise of profits, they are selling a security – even if there is no signed contract.

According to the SEC, Binance sold BUSD as part of a multi-faceted scheme involving interest payments and managed profit-seeking programs for BUSD that altogether became investment contracts. Even though Binance never promised that the price of BUSD itself would increase beyond $1, Commissioners argued that “BUSD investors’ expectation of profits came from the potential for direct, interest-like payments made by Binance, in part from the proceeds of deploying BUSD investors’ capital.”

Read more: Explained: How Binance’s stablecoin BUSD can be a security

Judge disagrees Binance’s scheme transformed BUSD into investment contract

Commissioners’ theory failed a judge’s review, however. A senior judge dismissed count #2 of SEC v. Binance Holdings Limited against Binance concerning sales of BUSD. After reviewing the facts, the judge concluded that the SEC “does not explicitly link the value of the token – which was tied to the U.S. dollar – to the success of the [Binance] platform. Nor does it spell out how promoting the ecosystem made BUSD more profitable when the alleged defining feature of the ‘stablecoin’ was that its value would remain constant.”

The judge continued, noting that although Binance and Paxos earned interest on the assets backing BUSD, the SEC did not adequately allege “that the coin holders would share in those returns in any way. For these reasons, the Court finds that the complaint does not plausibly allege that Binance offered and sold BUSD as an investment contract under the Howey test.

For these reasons, among others, the SEC seems to have ended its hopes of suing Paxos for minting BUSD in partnership with Binance.

Other stablecoins can be sold as securities

Interestingly, not all SEC theories as to stablecoin offerings being unregistered securities offerings have failed legal review.

Famously, in its Terraform lawsuit against Do Kwon’s Terra/LUNA company, a senior judge agreed with the Commissioners that Terraform offered the stablecoin UST via unregistered securities offerings. In that case, the profit-seeking scheme involving UST was so obvious and inextricably linked to the sales of UST that the scheme did, indeed, form an investment contract.

Nevertheless, Paxos and Binance have scored a victory regarding this particular stablecoin. If Fortune’s reporting is correct, it seems likely that Commissioners will not sue Paxos specifically regarding BUSD.

Of course, the SEC has not said they will not pursue enforcement actions against Paxos entirely, and Binance still has to defend itself against 12 of the SEC’s 13 civil complaints. For what it’s worth, Paxos will share in Binance’s victory of the single dismissal regarding BUSD.

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