Explaining blind spots: Why stablecoins may be considered securities? BUSD, USDC, USDT could be MMMF

Rumors are circulating that the U.S. SEC is investigating Paxos, the issuer of the third-largest stablecoin BUSD, possibly for issuing unregistered securities, prompting the crypto community to exclaim, "How is this possible?" In fact, the distance between stablecoins and securities may be closer than you think.

Recap: Insider: SEC to sue Paxos, issuer of BUSD, for allegedly issuing unregistered securities

Community Concerns: Does Paxos Stablecoin Not Pass the Howey Test?

Key legal knowledge for the cryptocurrency community: The "Howey Test" is a method used to determine whether something is considered a security.

Established in 1946 when the SEC sued Howey Company, the four evaluation criteria include: 1. Investment of money, 2. In a common enterprise, 3. With an expectation of profits, 4. Solely from the efforts of others.

Therefore, the community is puzzled by the idea that "a stablecoin that does not provide returns" may be considered a security.

Definition of Securities: More Than Just the Howey Test

However, the distance between stablecoins and securities may be closer than you think.

The precedents using the Howey Test are to determine whether Howey Company's product qualifies as an "investment contract," thus falling under securities law.

However, in the 1933 Securities Act in the U.S., the definition of securities is broad, with "investment contract" being just one type:

The term "security" includes any note, stock, treasury stock, bond, debenture... or any investment contract, options, or other interest in a common enterprise, usually involving the sharing of profits. It also includes "any certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease."

Adam Cochran, a venture capitalist, comments that this broad definition allows almost anything to be included if the SEC wishes. He notes that there is an entire field studying securities law, not solely relying on the Howey Test to define securities.

Are Stablecoins Money Market Mutual Funds (MMMFs)?

Venture capitalist Adam Cochran believes that stablecoins like BUSD, USDC, USDT, which are fully backed by reserves, resemble a money market fund.

Investigation shows that the IMF defines Money Market Mutual Funds (MMMFs) as securities provided by companies that invest in commercial paper, certificates of deposit, treasury securities, and repurchase agreements, a tool regulated by the SEC in the U.S.

MMMFs typically invest in high-quality, short-term, and liquid instruments. While they do not guarantee a fixed share price, they aim to keep the price stable, usually at one dollar per share.

This structure and pricing of assets behind stablecoins like BUSD, USDC, USDT are very similar to MMMFs.

The Issue: Stablecoins Do Not Provide Interest Rates?

Venture capitalist Adam Cochran argues that "If people are not earning interest by holding stablecoins, should they be considered securities?"

He suggests that a security does not need to be a good or profitable investment to be classified as such.

If someone holds or maintains value for you, and you trust their actions, it does not qualify for any exemptions; it is a security.