The SEC’s Decision to Drop Investigation into Paxos: A Victory for Stablecoins and the Crypto Industry

In a significant development for the crypto industry, the Securities and Exchange Commission (SEC) has decided to end its investigation into Paxos, a New York-based stablecoin issuer. The investigation focused on whether Paxos’ dollar-backed stablecoin, BUSD, should be classified as a security. The SEC’s decision to discontinue the probe is seen as a win for the stablecoin sector and provides clarity on the regulatory treatment of stablecoins.

The SEC’s acting chief of the crypto assets and cyber unit, Jorge Tenreiro, informed Paxos that he did not intend to recommend an enforcement action, according to a letter shared with Fortune. This decision comes after the SEC sent Paxos a Wells notice more than a year ago, signaling a potential enforcement action over BUSD, which was issued in partnership with Binance.

The SEC’s move to halt the investigation into Paxos comes on the heels of a recent setback for the agency in a lawsuit against the crypto exchange Binance. With regulatory clarity still elusive due to congressional inaction, the SEC’s decision brings relief to the stablecoin sector, which includes prominent players like PayPal and VanEck.

Walter Hessert, the head of strategy at Paxos, expressed relief at the termination of the investigation, highlighting the importance of creating certainty in the market for large enterprises. The decision is expected to pave the way for more opportunities and partnerships in the stablecoin space.

The Controversy Surrounding BUSD

Paxos launched BUSD in partnership with Binance in 2019, positioning it as a dollar-backed stablecoin within the Binance ecosystem. However, the SEC later argued in a lawsuit against Binance that BUSD constituted an investment contract and therefore a security. The SEC’s contention was based on the profits generated through the reserves backing BUSD, which were partially passed on to Binance users in the form of yields.

Despite Paxos’ assertion that BUSD was backed 1:1 with dollar-denominated reserves, the SEC’s stance created uncertainty within the stablecoin sector. The investigation into Paxos raised questions about the regulatory status of stablecoins and their classification as securities.

Following a prolonged investigation and legal proceedings, the SEC’s decision to drop the probe into Paxos marks a turning point for stablecoins in the U.S. The outcome is likely to bolster confidence in the stablecoin sector and encourage further innovation and expansion within the industry.

As firms have looked overseas to launch new stablecoin offerings amid regulatory uncertainties, the SEC’s resolution of the Paxos case may incentivize companies to pursue opportunities within the U.S. market. The decision underscores the importance of regulatory clarity in fostering a conducive environment for growth and development in the crypto industry.