The U.S. Securities and Exchange Commission (SEC) has officially ended its investigation into Paxos, the issuer of the Binance USD (BUSD) stablecoin, according to a recent Fortune report. This decision comes a year after the SEC issued a Wells Notice to Paxos, indicating potential enforcement action against the firm.

On July 9th, Jorge Tenreiro, the acting chief of the SEC’s crypto assets and cyber unit, informed Paxos that he would not recommend enforcement action. Walter Hessert, head of strategy at Paxos, expressed relief, stating:

“The termination of this investigation formally is an enormous relief for us. It’s what we expected all along, and it really should create, hopefully, more certainty in the market among what we see as a growing number of large enterprises.”

Background of the Investigation

Paxos received a Wells Notice from the SEC in February 2023, suggesting impending enforcement action over the dollar-backed BUSD stablecoin, which Paxos issued in partnership with Binance. 

The SEC argued that BUSD was a security because it generated profits for Binance and Paxos, and some of the profits were passed on to Binance users. Paxos disagreed, asserting that BUSD was backed 1:1 with dollar-denominated reserves.

As a result of this notice, stablecoins, which are pegged to the value of a fiat currency, remain in a regulatory gray zone. In contrast to other crypto assets, stablecoins lack a profit expectation, a crucial factor in determining securities.

A Turning Point

The investigation continued for over a year, with the SEC maintaining that it was “active and ongoing” as of July 3rd. However, the agency’s stance shifted after a federal judge ruled in favor of Binance on June 28th. 

The court held that the sales of BUSD did not constitute a securities offering, leading the SEC to drop the charge. This development offers a degree of clarity and relief to the market, which has been grappling with regulatory uncertainty.

Crypto community members, including Ran Neuner, responded to the news by saying the SEC literally destroyed Paxos which had over $20bn in TVL and was making over $1 billion by forcing the issuer to shut down.

Looking Ahead

While Congress continues to delay legislation to regulate the growing crypto asset class, the SEC’s decision provides a temporary reprieve for stablecoin issuers.

The SEC’s decision marks an unexpected win for the stablecoin sector, which includes companies like PayPal and VanEck. The end of the investigation into Paxos and BUSD highlights the need for clear regulatory guidelines to foster innovation and protect investors in the evolving cryptocurrency landscape.