PYUSD receives SEC subpoena, PayPal stablecoin will collapse again?

Original | Odaily Planet Daily

Author | Loopy

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Today, the stablecoin market is once again under pressure to comply with regulations.

PayPal has today received a subpoena from SEC enforcement regarding PayPal’s dollar stablecoin, known as PYUSD, requiring PayPal to produce a series of documents, according to PayPal disclosure documents. PayPal said it was cooperating with the SEC on the request.

In August 2023, PayPal officially launched PayPal USD (PYUSD), a dollar-denominated stablecoin, which is also the first time that a large financial company has issued its own stablecoin. 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. Treasuries, and similar cash equivalents, and can be exchanged 1:1 for U.S. dollars.

The expansion of the stablecoin business is crucial not only for PayPal’s crypto layout, but even more so for Paxos. Previously, Paxos’ stablecoin business went down due to the suspension of Paxos’ previous flagship product, BUSD, by regulators. With the launch of PYUSD, the market expects new opportunities for Paxos as well.

CoinMarketCap data shows that as of now, PYUSD has a circulating market capitalization of $158 million. Although it is relatively small compared to mainstream stablecoins, it is still a good start after a short time to go live.

At the time of the launch, PayPal President and CEO Dan Schulman said: "The shift to digital currencies requires a stable tool that is both digitally native and easy to connect with fiat currencies such as the US dollar. Our commitment to responsible innovation and compliance, as well as our track record of delivering new experiences to our customers, provide the necessary foundation to drive growth in digital payments through PayPal USD. ”

What are the risks of 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. One of the good things about PayPal is that this stablecoin is first available to US customers. Given the stringent crypto regulations in the United States, this also represents the compliance of PYUSD to a certain extent.

The PayPal president noted that PYUSD is a “fully supported, regulated stablecoin that has the potential to transform payments in web 3 and digital native environments.”

But now, the project is facing a potentially big blow. We can’t help but ask, what exactly happened to PYUSD?

In the disclosed filing, PayPal said the company’s selected escrow partners and PYUSD issuers are subject to regulatory oversight, meeting capital requirements, meeting audits and compliance industry certifications, and cybersecurity policies.

However, they are also honest that any disruption to the operations of any custodian (or issuer) or failure of the custodian (or issuer) to properly protect the cryptocurrency (or reserve assets) of the position could result in the loss of the client’s assets. This exposes PayPal to customer claims, reduces consumer confidence, and has a significant impact on its operating results and cryptocurrency offerings.

In addition, there are many more risks from the custodian, such as improper access, theft, vandalism, insufficient insurance, and so on.

The bankruptcy of the custodian is also seen as a risk of uncertainty. PayPal disclosed that while various regulatory regimes exist, the custody of crypto assets involves unique uncertainties. Sometimes, crypto assets under custody may be considered not to be part of the custodian’s estate. At present, the bankruptcy court has not clarified the appropriate treatment of digital asset custody holdings in bankruptcy proceedings. If the custodian fails, the outcome will be uncertain due to the lack of precedent.

**To be clear, however, the SEC is only asking PYUSD to provide documentation to cooperate with the investigation. **

There are no public documents showing the SEC’s specific claims (e.g., BUSD-like direct characterization of them as securities). At present, the documents disclosed by PYUSD show the potential risks of this stablecoin, but both PayPal and SEC are still in a state of missing details. This incident is bound to last longer, and more information is still to be revealed.

Next Libra, Next BUSD?

In 2019, Facebook officially announced its digital currency, Libra, an event that shocked the entire industry. Although Libra was stillborn for a variety of reasons. But the vision of the global giant with 3 billion monthly active users still writes a wonderful narrative for the convergence of the “mainstream world” and the “crypto world”, and contributes a lot of talent.

And in various speculations and studies, a significant number of people believe that Libra’s biggest dilemma is regulation. 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. With the strengthening of supervision in various fields, anti-money laundering and compliance requirements have always been a lingering haze for crypto companies.

The regulatory treatment of stablecoins is evolving and has attracted significant attention from legislative and regulatory bodies around the world, including the U.S. Securities and Exchange Commission. In practice, there is uncertainty as to 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.

And when the story of Libra is over, BUSD also demonstrates the vulnerability of stablecoins to regulation. The stablecoin giant, which once had a market capitalization of up to 15 billion and ranked among the top three in the market, withdrew from the stage of history overnight.

At the moment, PYUSD was still in its infancy, and it was met with the SEC’s investigative requirements. Will the future PYUSD repeat the mistakes of its predecessors?