SEC Drops Investigations into Paxos and Hiro Systems; “Proofs and Protocols”

SEC Drops Investigations into Paxos and Hiro Systems

What happened? 

The Securities and Exchange Commission’s (SEC) Division of Enforcement sent a letter to Paxos Trust Company notifying them that it does not intend to recommend an enforcement action against them for selling Binance USD (BUSD) tokens, a U.S. Dollar collateralized stablecoin. The letter follows a February 2023 Wells Notice, in which the SEC informed Paxos that it was under investigation for the unregistered issuance of BUSD. Upon receipt of the letter, Paxos issued the following statement: “Paxos Trust Company has always maintained that its USD-backed stablecoins are not securities under federal securities laws and that the Wells Notice was unwarranted and unjustified.” 

The SEC Division of Enforcement also sent a letter to Hiro Systems, the primary developer of the Stacks Blockchain, a Bitcoin layer 2 ecosystem. The Division stated that its investigation into Stacks Blockchain concluded, and that it does not intend to recommend an enforcement action. Hiro Systems released a statement that concluded with: “Our belief in enabling developers is also why we still believe strongly in the need to create a clear path and regulatory framework in the US, and we look forward to continued opportunities to help shape policy to meet builders of innovative open protocols where they are.”

What does this mean? 

The conclusion of both investigations comes after a series of attacks on the SEC’s regulation by enforcement approach to crypto companies, most recent being Judge Jackson’s ruling in the SEC v. Binance case. Remember this is the case in which the court ruled that the SEC failed to allege facts indicating that secondary market sales of BNB tokens on crypto exchanges were securities transactions and rejected the SEC’s argument that Binance’s fiat-backed stablecoin, BUSD, is an investment contract.  

“Proofs and Protocols”

“What I’ve noticed by being on both sides of tech and law is that, to an outsider, each seems impenetrable. So I’m starting a blog with a friend called Proofs and Protocols to discuss tech and law and hopefully make each more understandable for those outside of each field and interesting for those inside.” 

The inaugural post, from Daniel Barabander, Deputy General Counsel at Variant, analyzes the SEC’s allegations against Consensys and Coinbase, particularly focusing on wallet and swap functionalities. Barabander references DEF’s amicus brief in SEC v. Coinbase, which he worked on when he was still in private practice, and its discussion of the technical and legal aspects of the SEC’s allegations related to Coinbase Wallet and staking program. The post then critiques the SEC’s allegations against Consensys that it acted as a “broker” through its MetaMask Swaps app and argues they are not aligned with the realities of how the technology functions.

Be sure to check out the full post here.