USDC: has Circle been blocked by the SEC?

Yesterday, news broke that the SEC had ordered Circle to stop issuing new USDC tokens.

The news was based on rumors from anonymous sources, and was later denied by those directly involved. However, the issue remains open.

SEC vs stablecoins, will Circle’s USDC be next?

The real news, from a few days ago, is that the SEC has gone after Paxos, i.e., the issuer of BUSD (Binance USD).

The issue with this was that the reason given by the SEC was that Paxos was putting an unregistered security on the market. This is why rumors began to circulate about an alleged similar action also by the SEC against Circle, the issuer of USDC.

It appears that the SEC has begun a large-scale campaign against crypto offerings that resemble unregistered securities, i.e., real investment contracts that promise gains.

US dollar-based stablecoins, such as BUSD and USDC, in themselves are not investments and do not promise gains, but there are intermediaries who, against stablecoin loans, offer returns even higher than what can be obtained in the fiat currency lending markets.

In addition, Circle itself appears to have sued Paxos in recent months for improper reserve management, given that these stablecoins are fully collateralized, and their managers must therefore have sufficient cash or assets on hand to cover the full aggregate value of all tokens issued.

Circle’s complaint was sent to the NYDFS (New York State Department of Financial Services), which then actually instructed Paxos to stop issuing new BUSD tokens.

The problems with BUSD and USDC

It is worth noting, however, that despite all these problems, the market value of BUSD and USDC has not varied significantly.

As for BUSD, it is worth taking as a reference the exchange rate of the BUSD/USD pair on Binance, which has not deviated from $0.999 for days. However, it should be mentioned that on some other exchanges, for short or very short moments, the price has dropped as low as $0.995, or 0.5% below parity with the dollar.

As for USDC, it is convenient instead to take as a reference the exchange rate of the USDC/USD pair on Coinbase, which is Circle’s exchange partner. In this case the market value of USDC is exactly $1, with a small swing to -0.06% yesterday, and another to -0.04% today.

In other words, none of the ongoing problems have really caused these two stablecoins to lose their peg with the dollar, except to an insignificant extent and only for a very short period.

Instead, a separate matter concerns market capitalization, because in cases like these some holders of the tokens end up giving them back in exchange for fiat dollars, obviously with matching exchange rates, and this phenomenon decreases the circulating supply.

For example, in the last two days alone BUSD has lost more than 5% of its market capitalization, from 16.1 billion to 15.2.

Something similar also happened to USDC, but it had already lost only 1.7% of capitalization between 10 and 14 February, that is, up until the news of the SEC’s action against Circle, but then recovered slightly as the denial spread.

It is worth noting that over the past four days the market capitalization of USDT, the main competitor to BUSD and USDC, has increased by nearly 2%.

Right now USDT, or Tether dollar, capitalizes as much as 24% more than the sum of BUSD and USDC. At this time USDT is practically worth more than all other dollar stablecoins combined.

It is worth noting that USDC’s current capitalization is back to mid-December 2021 levels.

SEC: Circle’s denial, it will not stop issuing USDC

It appears that despite Circle’s denial, markets still fear for USDC’s future. By contrast, they seem to have taken confidence in Tether.

Indeed, this denial merely stated that as of yet Circle has not received any official notification from the SEC.

.@circle has not received a Wells notice. https://t.co/lE74zHVLka

— Dante Disparte (@ddisparte) February 14, 2023

It is worth noting that the Twitter account of FOX Business reporter Eleanor Terret, who had launched the news later denied by Circle, has been suspended.

So there seems to be no doubt that the news was false, but there does not seem to be as much certainty that the SEC is not also picking on Circle. Perhaps it is only a matter of time before an official notification arrives.

So despite the denial, fears remain, because the fact that so far such a report has not appeared, it does not seem that it cannot arrive in the next few days.

Indeed, it is no coincidence that there is a kind of small investor flight from USDC underway.

Suffice it to say that in June last year, in the midst of the collapse due to the implosion of the Terra/Luna ecosystem and the subsequent bankruptcy of Celsius, USDC capitalized nearly $56 billion, while now it has fallen to $41 billion. While it is true that the bulk of this decline occurred in 2022, it should not be forgotten that in mid-December the capitalization was still 45 billion.

In the same period USDC went from 45 to 41 billion, USDT went from 66 to 69 billion, and BUSD from 22 to 15 billion.

Also very interesting is the fact that the fourth stablecoin per market cap, DAI, has been declining for more than a year now, having fallen from 10 billion in February 2022 to the current 5 billion, but being an algorithmic stablecoin, it is inherently higher risk.

Unregistered security?

However, there are still strong doubts that stablecoins per se can be considered unregistered security because they neither offer nor promise financial returns.

One should therefore distinguish the mere issuance of tokens, and their proper collateralization, from those loan-based investment products that actually promise returns.

It is these, and not their mere issuance, that can be considered investment contracts, but the SEC right now is leveraging the fear of ending up in court to try to convince companies like Paxos not to issue stablecoins by actually threatening to take them to court.

The SEC is already in court with another similar lawsuit, against Ripple, and since it has been going on for more than two years without having reached a conclusion yet, it is possible that companies like Paxos may prefer to avoid such a rigmarole by opting out.

Not least because funds are scarce during the crypto winter, and such a lawsuit could run the risk of bankrupting them.

It is worth noting that the current chairman of the SEC, Gary Gensler, is not at all opposed to cryptocurrencies per se, but he seems to be something of a Bitcoin maximalist who does not like private companies issuing currency at all.

In fact, so far the SEC has done absolutely nothing to counter the use of BTC, while it is picking on several private companies that issue tokens or cryptocurrencies, or offer crypto investment products in the market.