What the SEC dropping its Paxos probe really means

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TheBinanceBay

The coolest thing about torrenting site ThePirateBay is that it really does operate like a pirate ship. When one jurisdiction forces it offline, it pops back up under a different domain.

At least in one point in time, ThePirateBay itself didn’t own any actual servers. Its operators instead chose to spread the site’s functionality across 21 virtual machines hosted around the world by various commercial cloud providers.

If one of the hosts pulled out, those virtual machines could be easily deployed to a different provider. More importantly, though, it meant there were no physical servers for police to seize.

And besides, the virtual server structure meant the actual cloud hosts keeping ThePirateBay online were unaware they were even hosting the torrenting portal — further insulating it against police.

Binance has operated under similar mystique. For the longest time, the company had claimed to have no headquarters, something new CEO Richard Teng walked back after taking over from founder and CEO Changpeng Zhao, who’s currently serving a four-month prison sentence in California.

Like ThePirateBay, Binance bounced between jurisdictions for years, from China to Japan and Malta, before all three eventually pushed the exchange to mosey on somewhere else. Dubai is currently tipped as the next potential destination to dock, although there hasn’t yet been any official announcement.

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Zhao was a big fan of Malta in 2018 but was forced to sail onwards

All this might explain why the SEC was so eager to cut Binance off from its primary stablecoin provider, the New York-headquartered Paxos, by threatening to take it to court to prove that BUSD was an unregistered security.

And that really worked: BUSD was the seventh largest cryptocurrency by market cap, worth $16.1 billion, before the SEC sent its Wells notice to Paxos in February 2023. Paxos stopped minting new tokens and over the next month, BUSD holders redeemed about half the supply. By January this year, there was only $100 million in circulation.

But while the US has seemingly thrown anything that might stick at Binance and Zhao, there appears to have been little impact on Binance user activity.

After collating the exchange’s monthly proof of reserves disclosures, it’s clear that Binance hasn’t skipped a beat, at least in terms of user capital on the platform.

*The dollar value of user deposits obviously rises alongside prices, but the purple area and the orange line would decouple if there were any mass user exodus*

Binance disclosed $115 billion in user funds at the start of July, up from $61 billion one year ago, and $45.6 billion when reports first surfaced of a years-long DOJ investigation in December 2022.

Other stablecoins including TrueUSD, USDT and FDUSD plugged the gap left after Paxos wound down BUSD, with the latter two headquartered outside the US. TrueUSD meanwhile fell out of favor, leading to a number of delistings earlier this year.

In any case, as Zhao waits out the rest of his sentence, the makeup of user funds on the platform is morphing, with the data indicating that the general consensus is to hold.

Bitcoin made up 18% of user funds in December 2022 — now it’s over one-third. Similarly, BNB went from 14% to 20%, while ETH has stayed largely unchanged at about 14%, presumably on account of lackluster price growth compared to bitcoin and BNB.

The real tell is that only one-fifth of all user funds on the platform are currently stablecoins — $24.4 billion — down from more than half before Zhao’s troubles really began. That means 80% of Binance user funds are held in non-dollar-pegged crypto assets.

Clearly, users are confident after the SEC and DOJ’s actions, not only that everything at Binance is above board, but that prices will rise from here.

— David Canellis

Data Center

SOL was only 1% of Binance user funds this time last year — now it’s over 4%.
USD flows to Binance are off to a ripper start to July, currently $1.02 billion net.
Net flows hit $7.1 billion in April, followed by $6 billion net outflows in the last two months.
BTC and ETH have slipped 2% each over the past day, to $57,250 and $3,070.
FLR, WIF and RNDR are the worst hit in the top-100 this week, down between 11% and 10%.

A win’s a win

Paxos is getting off scot-free after the SEC said it wouldn’t pursue legal action against the company.

Let’s back up for a second. The SEC issued Paxos a Wells notice last February. This came, obviously, before the SEC’s case against Binance in June.

I mention this because the SEC, in its complaint against Binance, alleged that BUSD was a security.

There’ve been some interesting developments in that case as well.

Last month, Judge Amy Berman Jackson — the judge overseeing the Binance case — ruled against a motion to dismiss filed by Binance and its US entities. However, there were a few curveballs hidden in her ruling.

Jackson wrote that the SEC didn’t “plausibly allege” that BUSD was offered and sold as an investment contract.

“The SEC makes the vague assertion that Binance used ‘at least a portion’ of those returns to enable and promote the Binance ecosystem, which it says “gave BUSD its potential profit,” but it does not explicitly link the value of the token — which was tied to the US dollar — to the success of the platform,” she said.

The SEC, at the hearing on the motion to dismiss, also tried to argue that it wasn’t claiming BUSD by itself was a security — but rather that it was sold as a “package” that promoted a “profit-making program.”

Judge Jackson, in denying the charge regarding BUSD sales, clearly decided that there wasn’t enough to support the claims.

Unfortunately, the BUSD of it all is a bit of a moot point, given that Paxos quickly shut down its Binance partnership and stopped issuing the stablecoin in late February of last year.

But there’s no doubt the SEC dropping the investigation is a win for Paxos.

“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 company said in a statement.

Does this mean that the SEC is potentially abandoning the ability to label stablecoins as a security?

“The SEC’s decision to not bring an enforcement action against Paxos signals that it may consider that USD-backed stablecoins are not securities. If the question of whether stablecoins are securities is definitively answered, the SEC would provide a necessary degree of regulatory certainty to this asset class,” said David Oliwenstein, partner at Pillsbury Law.

But others say it’s still unclear. Right now, there’s too little information to read deep into that scenario confidently.

The “declination letter is a significant victory for Paxos and what should be viewed as encouraging to the industry, even though it doesn’t establish with any certainty that any specific type of stablecoin is or is not a security,” Andrew Hinkes, partner at K&L Gates, said.

If you wanted to look on the positive side, then one might even think the SEC was somehow being thoughtful in its approach to regulating the industry. Or maybe it’s just acknowledging that BUSD is DOA at this point.

Either way, it’s Friday.

— Katherine Ross

The Works

The House failed to override President Biden’s veto of the anti-SAB 121 bill.
The SEC may allow some banks and brokerage firms to bypass SAB 121, Bloomberg reports.
Two lawmakers introduced a resolution to force Nigeria to send detained Binance executive Tigran Gambaryan back to the US.
OKX is reportedly leaning towards Malta as its European hub over France, CoinDesk reported.
Culper Research published a short report on bitcoin miner Iris Energy, dubbing it a “Prius at the Grand Prix.”

The Riff

Taking a page from the Gensler playbook?

That was the impression I couldn’t quite shake whilst following Rostin Behnam’s testimony yesterday before Congress.

According to Fox Business’ Eleanor Terrett, the CFTC chief reportedly said that 70-to-80% of the crypto market comprises “non-securities.” A bold statement, and suggestive of the idea that they’re commodities instead — and thus under the agency’s purview. Behnam might also be signaling that the CFTC is basing this reasoning on market capitalization, with BTC and ETH comprising the bulk of the pie.

Sound familiar? That kind of expansive terrain-charting is reminiscent of Gensler’s frequent citation that most of the crypto market consists of, well, securities — a declaration that would make it largely the SEC’s beat instead.

It’s certainly curious of Behnam to make such statements, especially as — if some Congress has its way — the two agencies will be required to join forces in some areas on crypto oversight.

Perhaps the jockeying for position, and money, has already begun.

— Michael McSweeney

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