SEC Drops PayPal’s PYUSD Investigation, Boosting Stablecoin Momentum

The U.S. Securities and Exchange Commission (SEC) has concluded its investigation into PayPal’s stablecoin, PYUSD, without taking any enforcement action. This decision was revealed in PayPal’s latest 10-Q filing for the first quarter of 2025. The inquiry, which began with a subpoena in November 2023, had sparked industry speculation about whether PYUSD could be classified as an unregistered security.

The closure of this investigation removes a significant legal hurdle for both PayPal and the issuer, Paxos. This move indicates a more measured regulatory approach towards certain stablecoin frameworks. The SEC’s subpoena was extensive, requesting documents related to PYUSD activities, but it did not allege specific violations. This decision aligns with recent regulatory shifts following the departure of former SEC Chair Gary Gensler, who frequently asserted that many tokens should be considered securities.

The exemption of PYUSD from further investigation could enhance the legislative momentum behind the GENIUS Act, a bipartisan Senate bill. This bill proposes a separate regulatory framework for payment stablecoins, including formal licensing for issuers at either the Federal Reserve or state level, mandatory 1:1 reserve backing, and monthly disclosure requirements.

PYUSD, launched by Paxos in August 2023, is the first payments-branded stablecoin from a major U.S. fintech company. It is fully backed by cash and short-term U.S. Treasury bills, with monthly attestations published to ensure transparency. PayPal has integrated PYUSD into its platforms, including Venmo, and enabled external ERC-20 transfers. As of the latest data, PYUSD’s circulating supply was approximately $879 million, representing less than 0.5% of the global stablecoin market.

Coinbase has recently waived trading fees for PYUSD and introduced one-click redemption to USD, which could improve liquidity and reduce user friction. Despite its modest market share compared to competitors like USDT and USDC, PayPal views PYUSD as a key component of its broader stablecoin strategy. The company plans to enable over 20 million small businesses to settle payments in PYUSD throughout 2025, positioning PayPal to bypass traditional card networks and develop native stablecoin-based payment infrastructure.

PayPal acknowledges the custodial and legal uncertainties associated with digital asset storage. The company notes in its risk disclosures that custodial crypto-assets may not receive traditional bankruptcy protections, and user funds could be treated as part of the custodian’s estate in an insolvency event. While these issues remain unresolved, the absence of SEC enforcement in the PYUSD case provides some regulatory clarity in an otherwise fragmented environment.

The SEC’s decision comes as other regulatory investigations into PayPal remain ongoing. The Consumer Financial Protection Bureau issued a Civil Investigative Demand regarding backup funding of PayPal Credit in August 2024, and Germany’s Federal Cartel Office continues a separate antitrust review. However, these matters do not pertain to PYUSD or its crypto-related functions.

In April, the SEC staff clarified that a specific subset of USD-backed, fully reserved, non-yield-bearing stablecoins (“Covered Stablecoins”) is not considered a security under federal securities laws. This guidance, however, is limited in scope and does not address all types of stablecoins nor does it constitute formal rulemaking or a Commission-wide decision. Despite the lack of a definitive ruling on the status of stablecoins under securities law, the SEC’s retreat in this case suggests that enforcement may not be the primary mechanism for shaping rules for dollar-backed tokens. Instead, the regulatory framework for stablecoins may evolve through legislative action in Congress.