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Are Stablecoins Securities? BUSD Faces SEC Action – Are Tether, USDC Next?

Last Updated June 26, 2023 9:53 AM
Teuta Franjkovic
Last Updated June 26, 2023 9:53 AM
Key Takeaways
  • Following the SEC’s actions, interest in stablecoins has increased
  • SEC has again taken the stance that most cryptos (except Bitcoin) are securities
  • It remains to be seen how the stablecoins will perform as more regulations come along

The SEC has been classifying specific crypto assets as securities in unrelated actions over the past few months, and in their most recent action against Binance, SEC said that BUSD, a stablecoin pushed by Binance, has been a security “since its inception.”

The SEC’s action comes after the New York Department of Financial Services ordered the cryptocurrency exchange Paxos to stop managing BUSD  a few months ago.  However, Binance’s CEO Changpeng Zhao admitted recently that, in 2020 and 2021, BUSD stablecoin hasn’t always been backed fully with reserves . Still, the company claimed the problem has been fixed and says that this issue never impacted user redemptions.

Due to regulatory pressure, other stablecoin projects might be at risk if BUSD fails.

SEC Accuses Binance of Making ‘Interest-Like’ Payments to Clients

According to the SEC , BUSD was issued by Binance and “Trust Company A.” Allegedly, Trust Company A and Binance agreed that Binance would collect client funds from the purchase of BUSD and invest them in revenue-generating ventures. Whether the money-generating opportunities were something as secure as treasury notes or as volatile as DeFi yield, the SEC didn’t appear to care. It only perceived these possibilities as “profit-generating” and saw that the parties “evenly split the net interest revenue earned on the reserves underlying BUSD.”

The SEC went on to say that Binance made “interest-like” payments to American citizens who were “simply buying BUSD” and to those who invested BUSD in yield programs developed by Binance: through BNB, BUSD, its “BNB Vault” program and “Simple Earn” program, as well as BAM Trading’s staking-as-a-service program, to be exact. Binance reportedly used “a portion of those returns” from the revenue-generating opportunities used by Trust Company A to pay out those distributions to users.

It is legally understandable how the SEC’s claimed facts contain elements of the “Howey test”. Howey utilized a Supreme Court ruling from 1946 to provide a framework for figuring out if a plan or arrangement qualifies as an “investment contract,” a type of security covered by the Securities Act of 1933. According to that concept, a scheme qualifies as a security if a buyer puts money into a shared venture, expects gains (either capital growth or a revenue share), and bases those rewards on the managerial efforts of others. According to the SEC’s accusations, retail customers purchased BUSD from Binance and invested money in it. That money was invested in the “common enterprise,” which was managed by Trust Company A.

All buyers of BUSD anticipated gains from the administrative efforts of Binance and Trust Company A since Binance promised holders of BUSD money and built a money-making ecosystem only available via BUSD. Just include retail customers for instant security – at least, that’s how the SEC most possibly looks at it.

Binance undoubtedly holds a different perspective, which it will be able to share with the public once it submits a response to the SEC’s 136-page lawsuit. A judge’s perspective could differ. What matters is that the SEC raised the warning flag high enough so that any stablecoin issuer can see it. Stablecoins may be security, in their opinion.

Other Stablecoin Issuers Possible Next SEC’s Target

Although the SEC bases its lawsuit against Binance on a Howey test, stablecoin issuers are also subject to the SEC’s purview. According to the Investment Corporation Act of 1940 , the regulator may claim, for instance, that a stablecoin satisfies the definition of a share in an open-end corporation.

The more the stablecoin behaves and appears like a share in a money market fund, which have their shares’ Net Asset Values linked 1:1 to the U.S. dollar, the more compelling this argument becomes. Alternatively, the SEC can contend that a stablecoin backed by a collection of actual assets qualifies as an asset-backed security under Regulation AB.

The SEC has more options than Howey for taking direct action against stablecoin ecosystem management, whatever it chooses to proceed. Additionally, it might use its enforcement powers against foreign parties promoting their stablecoins in the United States.

Stablecoins collateralized with assets off-chain, which frequently need to be centrally managed, make up the “lion’s share of the stablecoins market,” according to a stablecoin analysis from the Federal Reserve  that was released in December 2022. According to that source, stablecoins are “typically [pegged to] the U.S. dollar.” As a result, the majority of stablecoins have a connection to the United States, either because buyers are located there or because the issuer or asset managers are based there.

The SEC is perfectly aware of its capacity to influence events overseas as long as the buyers are American citizens. The Binance complaint criticizes Binance’s Swiss branch  for its part in issuing BUSD sold to American citizens.

Stablecoins with a U.S. nexus face a gloomy future, according to the SEC’s complaint. Others present an alternative to Congress as the regulator presents the courts in the United States with their vision of the future. With a road to comprehensive regulation for stablecoin issuers and a chance to avoid the torrent of SEC enforcement actions, the “McWaters” stablecoin law provides a more optimistic future.

USDT Assumes Command

According to market capitalization, USDT is now in first place. According to Santiment’s data , despite the fact that USDC and DAI are lagging behind USDT, both stablecoins have seen an increase in their market capitalisation lately.

The increase in market capitalization can be ascribed to these stablecoins’ expanding networks, which shows that new consumers are becoming interested in the stablecoin market.

Supply of USDT has reached a record high  of $83.35 billion. In contrast, USDC’s circulation has decreased.

Additionally, Tether has been purchasing Bitcoin using the yield produced by USDT’s hegemony. In the future, this might have a favorable effect on Bitcoin in general.


The other, perhaps unexpected, effect of the SEC’s outburst is that it has virtually approved of Bitcoin. A maxi’s fantasy has come true. All cryptocurrencies are currently trapped in regulatory limbo, but Bitcoin is completely legal and seems impenetrable.