The Securities and Exchange Commission is investigating whether stablecoins, cryptocurrencies that maintain a price of $1, are among the products that were issued in violation of investor-protection laws, the Wall Street Journal reported. SEC enforcement lawyers have told Paxos Trust Co. that regulators plan to take enforcement action over its stablecoin, BUSD, although that decision isn’t final. An SEC lawsuit over BUSD, the third-largest stablecoin by market value, would be a significant jolt to an industry that has suffered a series of shocks in recent weeks. After the failure of crypto exchange FTX, the SEC has already cut off the ability of some crypto middlemen to offer lending services that give crypto investors a way to earn interest by lending out their tokens. A lawsuit over stablecoins might not be easy for the SEC to win, according to securities lawyers, because stablecoin users don’t expect profits from owning the tokens. That motivation is one of the crucial prongs of a 1946 Supreme Court test, known as Howey, that regulators use to spot which cryptocurrencies are securities. “In your classic stablecoin…the profit is kept by the house,” said Timothy Spangler, a partner at Dechert LLP who has advised clients on the structure and formation of products tied to digital assets. Even so, he added, “Regulators are well within their jurisdiction to look under the hood.” Stablecoins are a form of cryptocurrency that make it easier to trade other digital assets. Each unit is supposed to maintain a value of $1. Traders can use stablecoins as a store of value, or use them to pay for other digital assets. Regulating them could take the SEC into the domain of overseeing payment products, something it doesn’t do. Stablecoin issuers say they are backed 1-for-1 by cash or cash equivalents such as U.S. dollars and Treasury securities. Tether Holdings Ltd., the largest stablecoin issuer, discloses most of its portfolio holdings but not all. It has invested in riskier assets such as corporate debt and has made money by lending tethers to customers, a practice it is winding down.
