What do stable coins and securities have in common
2023.02.13 03:43
What do stable coins and securities have in common
By Tiffany Smith
Budrigannews.com – Many in the community are puzzled as to how the United States Securities and Exchange Commission (SEC) could view a stablecoin as a security given the recently reported planned enforcement action against Paxos over Binance USD (BUSD).
According to blockchain lawyers interviewed by Cointelegraph, despite the fact that the response is not straightforward, there is a case to be made for it if the stablecoins were issued with the expectation of profit or were derivatives of securities.
The SEC intends to sue Paxos Trust Company over its 2019 issuance of Binance USD, a stablecoin it developed in partnership with Binance, according to a Wall Street Journal report on Feb. 12. According to reports, the SEC claims that the BUSD security has not been registered in the notice.
Please do not despise me; custody stablecoins are probably all securities.
I have repeatedly stated this.
According to Senior Lecturer Dr. Aaron Lane of RMIT’s Blockchain Innovation Hub, the SEC may claim that these stablecoins are securities, but the U.S. courts have not definitively tested that proposition:
“With stablecoins, a particularly contentious issue will be whether the investment led to an expectation of profit (the “third arm” of the Howey test).”
“From a narrow perspective, the stablecoin’s entire concept is stability. “It could be argued that opportunities for arbitrage, hedging, and staking provide an expectation of profit,” he stated.
Lane added that if a stablecoin is found to be a derivative of a security, it may be subject to securities laws in the United States.
In a speech to the American Bar Association Derivative and Futures Law Committee in July 2021, SEC Chairman Gary Gensler emphasized this point strongly:
“Don’t be mistaken: It doesn’t matter if it’s a stock token, a stable value token backed by securities, or any other virtual product that gives a false sense of exposure to the underlying securities.
He stated at the time, “These platforms — whether in the centralized or decentralized finance space — are implicated by the securities laws and must operate within our securities regime.”
Lane, on the other hand, emphasized that, in the end, every case “will turn on its own facts,” particularly when deciding on an algorithmic stablecoin rather than a crypto or fiat-collateralized one.
Quinn Emanuel Trial Lawyers addressed the issue in a recent post, explaining that stablecoins may occasionally be offered at a discount before sufficiently stabilizing in order to “ramp up” their value.
It stated that “these sales may support an argument that initial purchasers, despite formal disclaimers by issuers and purchasers alike, buy with the intent for resale following stabilization at the higher price,” and that the statement was based on the data.
However, while stablecoin guarantors might fall back on the courts to conclude the debate, many trust the SEC’s “guideline by implementation” approach is essentially inappropriate.
According to digital assets attorney and Piper Alderman partner Michael Bacina, the SEC should instead provide “sensible guidance” to assist industry players seeking legal compliance:
“SEC Commissioner Peirce recently made the observation that regulation by enforcement is an inefficient method of meeting policy outcomes in her vehement dissent regarding the Kraken prosecution. Engagement and sensible guidance is a far superior strategy than resorting to lawsuits when a rapidly expanding industry does not fit the existing regulatory framework and has been seeking clear paths to compliance.
Adam Cochran, a partner in Cinneamhain Ventures, offered a different perspective to his 181,000 Twitter followers on February 13, noting that the Securities and Exchange Commission (SEC) can sue any company that issues financial assets under the much broader Securities Act of 1933:
What people are unaware of is this.
Precedent for investment contracts is the Howey test.
The 1933 Securities Act defines a much broader category known as “Securities.”
Since the act is so ambiguous, it is fairly simple for the SEC to include anything under it if they so choose.
The digital asset investor then elaborated on the fact that the Howey Test is not the only one the SEC uses:
“These assets are similar to money market funds in that they expose holders to a security even if they do not earn from it because they hold underlying treasuries. Making an argument that they can be a security, even though I don’t agree with it.
“Worth fighting valiantly, but anyone who dismisses this as “lol the SEC got it wrong, this doesn’t pass the Howey test” should reevaluate. Believe it or not, the SEC has skilled securities counsel,” he continued.
Following reports that emerged on February 10 that the New York Department of Financial Services was conducting an investigation into Paxos Trust for an unconfirmed reason, the SEC announced its most recent planned action.
A spokesperson for Binance commented on the initial reports, stating that BUSD is a “Paxos issued and owned product” and that Binance licensed its brand to the company for use with BUSD. It added that BUSD is a “1 to 1 backed stablecoin” and that Paxos is regulated by the New York Department of Financial Services (NYDFS).
The spokesperson continued, “Stablecoins are a critical safety net for investors seeking refuge from volatile markets, and restricting their access would directly harm millions of people worldwide.” We will keep an eye on the situation. There are numerous stablecoins available to our global users.
More:
SEC Sues Paxos Trust Co over Binance USD
Brazilian bank allows to pay taxes to cryptocurrency
