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Are stablecoins securities? Well, its not so simple, say lawyers

Are stablecoins securities? Well, its not so simple, say lawyers

Recently reported planned enforcement action against Paxos by the United States Securities and Exchange Commission (SEC) over Binance USD (BUSD) has many in the community questioning how the regulator could see a stablecoin as a security.

Blockchain lawyers told Cointelegraph said that while the answer isn’t black and white, there exists an argument for it if the stablecoin was issued out in the expectation of profits or are derivative of securities.

A report from the Wall Street Journal on Feb. 12 revealed that the SEC is planning to sue Paxos Trust Company in relation to its issuance of Binance USD, a stablecoin it created in partnership with Binance in 2019. Within the notice, the SEC claims that BUSD is an unregistered security.

Senior Lecturer Dr. Aaron Lane of RMIT’s Blockchain Innovation Hub told Cointelegraph that while the SEC may claim these stablecoins to be securities, that proposition hasn’t been conclusively tested by the U.S. Courts:

“With stablecoins, a particularly contentious issue will be whether the investment in the stablecoin led a person to an expectation of profit (the ‘third arm’ of the Howey test).”

“On a narrow view, the whole idea of the stablecoin is that it is stable. On a broader view, it could be argued that arbitrage, hedging, and staking opportunities provide an expectation of profit,” he said.

Lane also explained that a stablecoin may fall under U.S. securities laws in the event that it is found to be a derivative of a security.

This is something that SEC Chairman Gary Gensler emphasized strongly in July 2021 in a speech to the American Bar Association Derivative and Futures Law Committee:

“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities.”

“These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime,” he said at the time.

However Lane stressed that ultimately each case “will turn on its own facts,” particularly when adjudicating on an algorithmic stablecoin as opposed to a crypto or fiat-collateralized one.

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