PayPal's PYUSD in Regulatory Crosshairs: SEC's Ongoing Crypto Crackdown

In the ever-evolving world of cryptocurrencies and digital assets, regulatory scrutiny is on the rise, and PayPal's stablecoin, PYUSD, has now come under the scrutiny of the U.S. SEC Division of Enforcement. PayPal recently revealed in a 10-Q filing that it had "received a subpoena from the U.S. SEC Division of Enforcement relating to PayPal USD." This development is just one instance of the SEC's growing interest in stablecoin market participants.

Stablecoin Spotlight: How Regulatory Scrutiny Impacts the Crypto Landscape

This isn't the first time the SEC has turned its attention to significant players in the stablecoin realm, highlighting the regulatory authority's increasing focus on this sector. As these investigations continue, it's essential to examine the structure of PayPal's stablecoin, PYUSD, in comparison to other dollar-pegged digital assets.

PYUSD is designed to maintain its peg to the U.S. dollar through a reserve composed of "secure and highly liquid assets," such as dollar deposits, U.S. treasuries, and cash equivalents, as outlined on PayPal's website. Notably, this approach is similar to the mechanisms used by other major stablecoins like Tether (USDT) and USD Coin (USDC).

For instance, Tether states that "All Tether tokens are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves." However, a closer examination reveals that these reserves primarily consist of U.S. treasury bills, with cash accounting for a surprisingly small portion. The mix also includes overnight and term reverse repurchase agreements, money market funds, and secured loans. Notably, Tether's reserves comprise around $1.6 billion in bitcoins, precious metals, and a diverse category of "other investments."

Similarly, Circle, the company behind USDC, employs a comparable approach with its reserve assets, consisting of cash, short-dated U.S. Treasuries, and overnight U.S. Treasury repurchase agreements.

Comparing Stablecoin Structures: PYUSD, USDT, and USDC Under the SEC's Watchful Eye

In essence, these stablecoins, including USDC and Tether, cannot be categorically described as "fiat-backed" stablecoins, given the predominant role of U.S. Treasuries over traditional fiat currency.

The pivotal role played by U.S. Treasuries in these stablecoin markets is one that the SEC's enforcement division may seize upon to justify its regulatory stance. Centralized parties managing these reserves are key to sustaining confidence among retail buyers that one stablecoin unit indeed equals one U.S. dollar over time.

Importantly, while this centralization risk is an industry-wide concern, PayPal has taken steps to distance itself from it. PYUSD is explicitly issued by Paxos, not PayPal. Furthermore, Paxos, not PayPal, is responsible for buying and selling PYUSD at a stable price of $1.00 U.S. dollar per PYUSD token. Effectively, PYUSD is a Paxos stablecoin marketed through the PayPal platform.

For emerging stablecoin issuers, the SEC's actions serve as a clear signal that regulatory scrutiny in the crypto space is here to stay. It's prudent to anticipate an SEC subpoena following a public launch for any new issuer adopting a reserve-backed approach to maintaining a currency peg. As we look ahead to 2024, it appears the industry will have to navigate this regulatory landscape with caution.