SEC Subpoena Over PayPal Stablecoin Leaves Crypto Observers Confused

In the fine print of its Q3 earnings, PayPal revealed that it has received a subpoena from the US Securities and Exchange Commission (SEC) regarding its newly-launched stablecoin.

“On November 1, 2023, we received a subpoena from the US SEC Division of Enforcement relating to PayPal USD stablecoin,” the company said in its latest Form 10-Q.

“The subpoena requests the production of documents. We are cooperating with the SEC in connection with this request.”

A Form 10-Q is a comprehensive report of financial performance that must be submitted to the SEC each quarter by all publicly traded companies.

In a Form 10-Q, firms are required to disclose all relevant information regarding their finances that may affect their business operations.

It is, therefore, a much longer and more detailed version of a company’s earnings report than that which is provided to investors and the general public.

PayPal did not provide any further information regarding the subpoena in the Form 10-Q, and did not respond to an enquiry about the subpoena from Vixio.

However, PayPal’s new CEO, Alex Chriss, appointed in September, did mention PYUSD once in a Q3 earnings call with investors.

“We've launched the first regulated stablecoin by a global payments company in PYUSD, connecting our PayPal and Venmo ecosystems together and creating one of the most robust peer-to-peer (P2P) networks in the world,” he said.

“Individually, these are each incredible innovations, but we have not yet brought them all together into a cohesive, integrated and seamless customer experience and value proposition.”

Are stablecoins securities?

At the very least, it can be inferred from the subpoena that the SEC believes it has jurisdiction over PYUSD, and this would indicate that it sees the stablecoin as potentially a security offering.

Over the years, the SEC has made several statements to this effect about stablecoins, but its enforcement of securities laws against stablecoin activities has been rare and inconsistent.

In July 2021, during a speech at the American Bar Association, SEC chair Gary Gensler said explicitly that securities laws can apply to stablecoins.

“Make no mistake,” he said. “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,” he said of crypto trading platforms, “whether in the decentralised or centralised finance spaces, are implicated by the securities laws and must work within our securities regime.”

Although not designed to “provide exposure” to US Treasury bills, PYUSD is backed not only by cash deposits but also by US Treasury bills, i.e. by securities.

Most major stablecoins, including Circle’s USDC and Tether’s USDT, are currently backed in the same way.

In September 2022, Gensler said stablecoins share similar attributes to money market funds and other securities, but may not necessarily be securities in and of themselves.

“Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; what mechanisms are used to maintain value; or how the tokens are offered, sold and used within the crypto ecosystem, they may be shares of a money market fund or another kind of security.

“If so, they would need to register and provide important investor protections.”

Putting securities laws to the stablecoin test

In June, when the SEC filed 13 charges against Binance and CEO Changpeng Zhao, one of the charges was aimed at the Binance stablecoin, BUSD.

The SEC alleges that BUSD was offered as a security without registration, and thereby in violation of the Securities Act 1933.

As evidence to support this claim, the SEC pointed to numerous examples of Binance “touting” the “investment potential” of BUSD when used in interest-bearing products such as Binance Earn.

In contrast, PayPal has marketed PYUSD primarily on its attributes as a payment method; for example, using PYUSD offers cost-free P2P transfers.

It is, therefore, unlikely that the SEC is building a similar case against PYUSD as it brought against BUSD, and that has left some observers perplexed as to the reason for the subpoena.

SEC should target real offenders

Austin Campbell, founder and managing partner at Zero Knowledge Consulting and lecturer at Columbia Business School, said the subpoena is yet more evidence of the SEC’s skewed priorities on crypto enforcement.

“Being incredibly blunt here, if PYUSD is a security, so are Starbucks gift cards, prepaid debit cards and airline reward points,” he said.

“This thing fails the Howey test so spectacularly it would be laughed out of court by a judge.

“It's also safer for consumers than standard PayPal e-money because it's bankruptcy-remote. This is strictly better in all ways.”

Instead, Campbell suggested the SEC should focus more on obvious bad actors in the space that are believed to have broken securities laws.

“In a target-rich environment, the SEC continues to avoid going after anyone actually doing wrong and instead continues to target legitimate companies helping consumers,” he said.

“It is guaranteed to damage American security interests and push the space offshore, in a way that makes it more viable for terrorists and criminals to use crypto.”