SEC Drops Stablecoin Probe, Marking a Win for Paxos and the Crypto Industry

In a significant move, the SEC has ended its investigation into Paxos' BUSD stablecoin, signaling a potential shift in regulatory stance toward the crypto industry.

The Securities and Exchange Commission (SEC) has dropped its probe into Paxos' BUSD stablecoin, a move that could signal a shift in the regulatory body's stance toward the crypto industry, Fortune reported Wednesday.

Acting chief of the SEC's crypto assets and cyber unit Jorge Tenreiro notified Paxos on July 9 that he does not intend to recommend an enforcement action, according to the report, citing a person familiar with the matter.

This notice comes more than a year after the SEC reportedly sent a Wells notice to Paxos, signaling an impending enforcement action over the BUSD stablecoin, which Paxos issues in partnership with Binance.

The SEC's retreat follows a partial defeat in a lawsuit against Binance, where a federal judge ruled that the sales of BUSD did not constitute a securities offering, as covered by Blockworks previously. The judge's decision appeared to influence the SEC's stance on the matter, according to the report.

This decision is a relief for Paxos and the broader stablecoin sector, which includes major players like PayPal and VanEck. Walter Hessert, head of strategy at Paxos, expressed optimism, telling Fortune that the termination of the investigation should create more certainty in the market and foster new enterprise partnerships.

The SEC's move is particularly timely as Congress continues to delay legislation to regulate the growing asset class. Stablecoins have been in a regulatory gray zone, but many in the industry argue that the absence of an expectation of profit — a key factor in determining securities — sets them apart from other crypto assets.

Paxos first launched BUSD in partnership with Binance in September 2019. While it never overtook competitors like Tether and USDC, it became a significant player in the stablecoin market due to its integration with the Binance ecosystem.

The SEC had argued that BUSD was an investment contract and thus a security because it generated profits through its reserves. Paxos, however, maintained that BUSD was backed 1:1 with dollar-denominated reserves and disagreed with the SEC's application of the Howey Test to the stablecoin.

The investigation had placed a cloud over Paxos, impacting its ability to form new partnerships, including potential collaborations with companies like PayPal. Hessert noted that the end of the investigation would likely accelerate enterprise conversations.

The SEC's decision could bolster the stablecoin sector in the U.S., which has seen firms looking abroad to launch new offerings amid regulatory uncertainty. As the crypto industry continues to evolve, the resolution of this investigation may serve as a precedent for how similar cases are handled in the future.