Are stablecoins considered securities? – That’s what experts say

• SEC tightens action against crypto sector
• Stablecoins are also being targeted
• How can stablecoins be classified as securities at all?

The debate as to whether cyber currencies should be classified as commodities, currencies or securities is by no means new. But the US stock exchange watchdog, who is responsible for the latter, recently tightened their pace.

question of enormous importance

This question of attribution is more than just philosophical, in reality it has tangible legal implications. Because the legal regulations for buying, holding and selling are very different for commodities, currencies and securities.

Accordingly, they fall under the responsibility of different supervisory authorities. The United States Securities and Exchange Commission (SEC) is responsible for US securities trading, while another institution called the Commodity Futures Trading Commission (CFTC) is responsible for regulating commodity trading. For example, securities can only be legally sold to the public if the issuer registers with the SEC and adheres to strict disclosure requirements. In contrast, the rules for commodities trading administered by the CFTC are generally less strict.

SEC considers lawsuit against Paxos

This discussion has also heated up now that even Binance USD (BUSD) has been targeted by the SEC. The third-largest stablecoin, after Tether and Circle Dollar, is issued by regulated blockchain and tokenization infrastructure platform Paxos. Stablecoins are digital currencies whose value is usually linked to government fiat currencies. According to a Paxos press release, “BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves”.

According to the company, on February 3, Paxos was notified by the SEC that the agency was considering a lawsuit alleging that BUSD was a security and that Paxos should have registered BUSD’s offering under US securities laws. The letter to Binance’s US partner, which manages the BUSD stablecoin belonging to the crypto exchange, is a so-called “Wells Notice”, i.e. brief information that gives the company the opportunity to comment on the matter or possibly also seek an out-of-court settlement.

However, the decision by the authority did not come as a complete surprise. After all, SEC boss Gary Gensler, who is considered an expert on the crypto scene, already stated at a panel discussion in November 2021 that he saw stablecoins as something similar to bank deposits or money market funds.

arbitrariness of the SEC

Crypto analyst and investor Miles Deutscher has nevertheless criticized the US Securities and Exchange Commission for its actions, asking on Twitter: “How on earth can a stablecoin be considered a security when it clearly does not meet the criteria of the Howey test Fulfills?”

If all elements of this test, named for the SEC’s 1946 Supreme Court case against William John Howey, are met, then an investment agreement exists and the securities regulations apply. One of the criteria of Howey’s test is the expectation of making a profit from the investment, but according to Deutscher, this does not apply to BUSD buyers.

According to Cointelegraph, however, lawyers do see arguments that stablecoins were issued in anticipation of profits or are a derivative of securities. However, this has not yet been finally examined by the US courts. “With stablecoins, it will be particularly controversial whether investing in the stablecoin has given a person an expectation of profit,” Senior Lecturer Dr. Aaron Lane quoted from RMIT’s Blockchain Innovation Hub.

Adam Cochran opened up a completely different perspective to his Twitter followers: As the partner of Cinneamhain Ventures explained, the SEC has a lot of freedom because it is not limited to the Howey test. This only applies to investment contracts, whereas the term securities is a “much broader category” under the much broader Securities Act of 1933, according to the crypto investor. “To be honest, the term is so vague that the SEC can mean anything if they want to,” he wrote in a tweet.

“The fact that these assets contain underlying government bonds makes them a money market fund that exposes the holders to a security even if they don’t earn anything from it,” Digideutsche.com quoted the digital asset investor as saying. And further: “It’s worth fighting tooth and nail about it, but anyone who dismisses this with a shrug as, ‘lol, the SEC was wrong, that doesn’t pass the Howey test’ needs to reevaluate. Whether Believe it or not, the SEC has knowledgeable securities attorneys.”

Epic battle awaits

When it comes to cryptocurrencies, the SEC is walking a difficult tightrope between investor protection and progress in the financial market. Some experts are expecting a tough battle over regulation in 2023: “There will be proposals for strict crypto regulation and the community will engage in an epic battle against those components that threaten decentralization,” Coindesk quoted Laura Shin as saying. the host of the “Unchained” podcast.

Editorial office finanzen.net

Image sources: Andrew Harnik/AP, Kristi Blokhin / Shutterstock.com



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