Regulatory Heat Turns on PayPal as SEC Investigates PYUSD Stablecoin

BY Andrew Rossow

November 03, 2023

Stablecoins have emerged as a pivotal point of contention between fintech innovation and regulatory oversight, with more questions than answers.  

The recent subpoena issued by the U.S. Securities and Exchange Commission (SEC) to PayPal regarding its foray into this contentious domain with the August launch of its PayPal USD (PYUSD) stablecoin underscores growing apprehension amongst regulators. 

This latest move by the SEC is particularly significant as PYUSD represents the first stablecoin initiative by a major financial services firm, a milestone that has not gone unnoticed by watchdogs.

The ghost of past initiatives, such as Facebook’s ill-fated Libra project, looms large over PayPal’s endeavor. Libra’s attempt to create a global digital currency sparked a furor among regulators worldwide, concerned about the potential systemic risks it posed and the threat it could present to sovereign currencies. 


With PayPal’s entry into this space, those fears have been reignited. The specter of a stablecoin tied to a tech giant’s vast network portends a scenario where digital assets could achieve rapid, widespread adoption, challenging the established monetary order and potentially threatening the financial stability of the United States.

Regulatory bodies, like the SEC, are grappling with a digital age conundrum: how to foster technological advancement and protect consumer interests without stifling innovation. 

The subpoena to PayPal is a clear indication that the SEC is taking a proactive stance in this debate, signaling to all market participants that the path forward will be one of careful scrutiny and regulatory compliance.

As PayPal navigates this regulatory scrutiny, its actions and the SEC’s responses are set to shape the legislative landscape for stablecoins and could significantly influence the future integration of cryptocurrencies within mainstream finance. 

With the SEC’s watchful eye and PayPal’s compliance efforts, the unfolding dynamics will likely serve as a precedent for how similar digital currency endeavors will be treated by regulatory authorities.

Ripple Labs

While the SEC’s “attentiveness” to these concerns seems to be a step in the right direction, it is still navigating its internal tumultuous waters of how it intends to address these issues, including the most appropriate division and/or regulatory agency to take those concerns on. 

The three-year-long legal battle between the SEC and Ripple Labs is one of those situations. In December 2020, the SEC filed its initial lawsuit against Ripply, alleging that it had raised $1.4 billion through an unregistered securities offering. 

In what was deemed a partial win for Ripple, the court granted part of the SEC’s motion that specifically addressed the $728 million in institutional sales. In her July ruling, U.S. District Court Judge Analisa Torres ruled that while the sales of XRP did constitute an unregistered securities offering, its sale of the token on crypto exchanges did not. 

The court elaborated further that “reasonable investors…in the position of institutional buyers, would have purchased XRP with the expectation that they would derive profits from Ripple’s efforts.” But in this case, XRP buyers had no reasonable expectation of profits based on Ripple’s efforts. 

However, Judge Torres also ruled that while XRP is a digital token, that in and of itself is not considered a “contract, transaction, or scheme” that would meet the required elements of an “investment contract” under the landmark Howey Test.

In early October, the SEC failed to convince Judge Torres that Ripple’s direct sale of its XRP tokens to U.S. consumers through public exchanges constituted unregistered securities offerings, and therefore, the court’s July ruling should be overturned. 

In its attempt to appeal Judge Torres’ findings with respect to the “programmatic” sales of XRP, the court found that there was “no substantial ground for difference of opinion” that would make a material impact in the case that would offer a different conclusion.

For this reason, Judge Torres refused to allow the SEC to appeal the court’s decision involving Ripple. 

Editor’s note: This article was written by an nft now staff member in collaboration with OpenAI’s GPT-4.

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