PYUSD received a subpoena from the SEC, will PayPal’s stablecoin suffer another blow?
Original - Odaily
Author - Loopy
Today, the stablecoin market has once again experienced major changes.
Documents disclosed by PayPal stated that PayPal has received a subpoena from the SEC Enforcement Division today regarding PayPal’s U.S. dollar stable currency (PYUSD). The subpoena requires PayPal to produce a series of documents. PayPal said it is cooperating with the SEC on the request.
In August 2023, PayPal officially launched the US dollar-denominated stable currency PayPal USD (PYUSD). This was also the first time that a large financial company issued its own stable currency. PayPal USD is based on Ethereum (ERC 20), issued by Paxos Trust Company, and is 100% backed by U.S. dollars, short-term U.S. Treasury bills and similar cash equivalents, and can be exchanged for U.S. dollars at a 1:1 rate.
The expansion of this stablecoin business is not only crucial to PayPal’s encryption layout, but also to Paxos. Previously, Paxos’s stablecoin business went into decline due to the suspension of Paxos’ flagship product BUSD by regulatory authorities. With the help of this cooperation to issue PYUSD, Paxos may also have an opportunity for recovery.
CoinMarketCap data shows that as of now, the circulating market value of PYUSD is US$158 million. Although this figure is extremely small compared to mainstream stablecoins, it is still a good start.
At the time of the launch, PayPal President and CEO Dan Schulman said: “The shift to digital currency requires a stable tool that is both digitally native and easily connected to fiat currencies such as the U.S. dollar. We are committed to innovation and compliance. Our commitment to responsibility and our track record of delivering new experiences for our customers provide the foundation necessary to drive the growth of digital payments through PayPal USD.
What are the risks with PYUSD?
In September 2023, PayPal launched PYUSD for Venmo customers. Venmo is a mobile payment service owned by PayPal.
It’s not uncommon for giants to dabble in stablecoins. And one of the nice things about PayPal is that this stablecoin is available to US customers first. In view of the strict encryption regulations in the United States, this also represents the compliance of PYUSD to a certain extent.
PayPal’s president noted that PYUSD is a “fully supported, regulated stablecoin with the potential to transform payments in web 3 and digitally native environments.”
But now, the project faces a potentially huge blow. We can’t help but ask, what exactly happened to PYUSD?
In the disclosure, PayPal said the companys selection of custody partners and PYUSD issuers is subject to regulatory oversight, meeting capital requirements, compliance with audit and compliance industry certifications, and cybersecurity policies.
However, they also honestly stated that if the operations of any custodian (or issuer) are interrupted and the custodian (or issuer) fails to protect the cryptocurrency holdings (or reserve assets) well, it may result in the loss of customer assets. This would expose PayPal to customer claims, reduce consumer confidence, and have a significant impact on its operating results and cryptocurrency offerings.
In addition, there are more risks from the custodian, such as improper access, theft, vandalism, insufficient insurance, etc.
The bankruptcy of the custodian is also considered an uncertain risk. PayPal disclosed that despite various regulatory regimes, the custody of crypto assets still involves unique uncertainties. At times, cryptoassets held in custody may be deemed not to be part of the custodians bankruptcy estate. Currently, bankruptcy courts have not yet clarified the appropriate treatment of digital asset custodial holdings in bankruptcy proceedings. If the trustee fails, the outcome will be uncertain due to the lack of precedent.
But it needs to be clear that this SEC is only asking PYUSD to provide documents to cooperate with the investigation.
There are no public documents showing the SEC’s specific claims (such as directly characterizing it as a security like BUSD). At present, the documents disclosed by PYUSD show the potential risks of this stable currency, but both PayPal and the SEC are still in a state of lack of detailed information. This incident is bound to last longer, and more information remains to be disclosed.
The next Libra, or the next BUSD?
In 2019, Facebook officially announced the digital currency Libra, which shocked the entire industry. Although Libra was ultimately stillborn for various reasons. However, the encryption exploration of this global giant with 3 billion monthly active users still composes the most grand and exciting narrative for the integration of the mainstream world and the encryption world.
In various speculations and studies, quite a few people believe that Libra’s biggest dilemma lies in supervision. Its stabilization mechanism has caused huge collisions and rifts between Libra and the traditional world.
PayPal’s stablecoin has been extended to Venmo, and combined with PayPal’s business scenarios, it will undoubtedly produce rich application scenarios. This will greatly increase the difficulty of anti-money laundering. As supervision intensifies in various fields, anti-money laundering and compliance requirements have always been a lingering haze for crypto companies.
The regulatory treatment of stablecoins is constantly evolving and is attracting significant attention from legislative and regulatory agencies around the world, including the U.S. Securities and Exchange Commission. In practice, there is uncertainty about how ongoing changes in federal, state, and international laws and regulations will apply to stablecoins, and PYUSD may face significant costs to operate and comply with any additional or changed requirements.
When the Libra story ended, BUSD once again demonstrated for us the vulnerability of stablecoins in the face of regulation. The stablecoin giant, which once had a market capitalization of 15 billion and ranked among the top three in the market, announced the end of its rule almost overnight.
At present, the market value of PYUSD is only over 100 million, and it is still in its infancy, but it has encountered the SEC’s investigation requirements. Will PYUSD in the future repeat the mistakes of its predecessors?
