SEC Clarifies Regulatory Treatment of Stablecoins

Stablecoins Not Considered Securities Under Federal Law

The Securities and Exchange Commission (SEC) has issued a statement clarifying its position on the regulatory treatment of stablecoins. According to the SEC, stablecoins backed by cash or cash-equivalent reserves and redeemable for US dollars on a one-to-one basis are not considered securities under federal law.

Covered Stablecoins: A New Category

The SEC’s Division of Corporation Finance has outlined its legal views on what it terms “Covered Stablecoins.” This category includes fiat-backed digital tokens designed to maintain price stability through fully reserved dollar holdings. The SEC’s statement provides clarity for stablecoin issuers, fintech firms, and crypto payment providers that have long operated in regulatory uncertainty.

Key Characteristics of Covered Stablecoins

To be considered a Covered Stablecoin, an issuer must meet the following criteria:

* The stablecoin must be redeemable for USD at a fixed price, at any time, and in unlimited quantities.
* The issuer must maintain a fully backed reserve consisting of cash or liquid, low-risk assets such as US Treasury bills.
* The reserves must be segregated, not used for the issuer’s business operations, and safeguarded from third-party claims.
* In some cases, issuers must publish proof-of-reserve attestations to verify solvency and transparency.

Not Considered Securities Transactions

According to the SEC, the offer and sale of Covered Stablecoins do not involve securities transactions and, therefore, do not require registration under the Securities Act of 1933 or the Securities Exchange Act of 1934. The agency emphasized that Covered Stablecoins are designed and marketed solely as tools for payments, money transmission, and value storage.

Key Distinctions

The SEC highlighted several key distinctions between Covered Stablecoins and securities:

* Covered Stablecoins do not grant holders interest, profits, governance rights, or ownership claims.
* They are typically described as “digital dollars” rather than investment products.
* The tokens are not promoted as profit-generating instruments, a key distinction under federal securities law.

Relevant Legal Standards

The SEC’s conclusion was based on two landmark legal standards:

* The Reves v. Ernst & Young test, which examines whether an instrument is used for routine commercial transactions or speculative purposes.
* The Howey test, which examines whether an arrangement involves investing money in a common enterprise with an expectation of profit from others’ efforts.

Howey Test Considerations

The SEC applied the Howey test to determine that Covered Stablecoin holders are not investing for returns and that the economic reality is that of a consumer transaction, not an investment contract.

Questions Concerning Yield Remain

The SEC highlighted that holders of Covered Stablecoins do not receive any form of yield or share in the earnings generated from reserve assets. While issuers may earn interest on the assets held in reserve, those earnings are retained by the issuer and not distributed to token holders.

Conclusion

The SEC’s statement provides clarity on the regulatory treatment of stablecoins and marks a significant milestone in delineating the boundaries of digital dollar equivalents. However, questions concerning yield remain, and the agency noted that tokens promising returns, profit-sharing, or exposure to an issuer’s financial performance could still be subject to securities laws.

FAQs

Q: Are stablecoins considered securities under federal law?

A: No, stablecoins backed by cash or cash-equivalent reserves and redeemable for US dollars on a one-to-one basis are not considered securities under federal law, according to the SEC.

Q: What is the SEC’s definition of Covered Stablecoins?

A: Covered Stablecoins are fiat-backed digital tokens designed to maintain price stability through fully reserved dollar holdings and meet specific criteria outlined by the SEC.

Q: What are the key characteristics of Covered Stablecoins?

A: Covered Stablecoins must be redeemable for USD at a fixed price, maintain a fully backed reserve, and be segregated and safeguarded from third-party claims.

Q: Are Covered Stablecoins considered securities transactions?

A: No, the offer and sale of Covered Stablecoins do not involve securities transactions and do not require registration under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Q: How does the SEC’s statement affect the regulatory treatment of stablecoins?

A: The SEC’s statement provides clarity on the regulatory treatment of stablecoins and marks a significant milestone in delineating the boundaries of digital dollar equivalents.

Q: What questions concerning yield remain?

A: The SEC highlighted that holders of Covered Stablecoins do not receive any form of yield or share in the earnings generated from reserve assets, and tokens promising returns, profit-sharing, or exposure to an issuer’s financial performance could still be subject to securities laws.