SEC Probes Stablecoin Scandal: Investor-Protection Laws at Risk

• The US Securities and Exchange Commission is investigating whether stablecoins were issued in violation of investor-protection laws.
• Regulators plan to take enforcement action over Paxos Trust Co.’s BUSD stablecoin, prompting the company to stop minting BUSD indefinitely.
• Stablecoin issuers are backed 1-for-1 by cash or cash equivalents such as U.S. dollars and Treasury securities, but the SEC is probing whether they are actually securities.

SEC Investigates Stablecoins for Investor-Protection Law Breaches

The US Securities and Exchange Commission (SEC) is exploring potential violations of investor-protection laws related to the issuance of stablecoins. SEC enforcement lawyers have notified Paxos Trust Co., issuer of the third largest stablecoin by market value (BUSD), that they intend to take legal action against it, causing the company to suspend minting new BUSD tokens indefinitely.

What are Stablecoins?

Stablecoins are a form of cryptocurrency designed to maintain a consistent value of $1 USD per unit. As such, they make it easier to trade other digital assets, but raise questions about how they should be regulated as products not usually overseen by the SEC – notes or securities promising repayment of money with interest – could potentially qualify them as securities under Supreme Court tests used by regulators.

Stablecoin Issuers Under Scrutiny

Stablecoin issuers state that their coins are backed 1-for-1 by cash or cash equivalents such as U.S dollars and Treasury securities; however, Tether (the largest issuer) has disclosed only some portfolio holdings while also investing in more risky assets like corporate debt and previously profiting from lending tethers out to customers (which it is now winding down). In addition, Coinbase Global Inc has disclosed that it too is being investigated by the SEC for its stablecoin product.

Are Stablecoins Actually Securities?

Motivations behind owning these assets do not include expecting profit which is one prong of the 1946 Howey Supreme Court test used by regulators when determining whether cryptocurrencies qualify as securities; however, this isn’t necessarily definitive proof that they aren’t securities according to lawyers consulted on this matter as both Tether and BUSD have been labeled „virtual currencies“ by Commodity Futures Trading Commission and New York State Department of Financial Services respectively.


The investigation into stablecoins continues with no definite conclusions yet reached on whether these products constitute a security under US law; however, given recent developments it seems likely that we will find out soon enough what type of legal ramifications companies issuing them may face if found in breach of any regulations governing their release and sale on the open market..