SEC Clarifies: Most Stablecoins Are Not Securities

The U.S. Securities and Exchange Commission (SEC) has issued a landmark ruling that clarifies the regulatory status of stablecoins, providing much-needed clarity for the cryptocurrency market. On April 4, 2025, the SEC's Division of Corporation Finance announced that stablecoins backed by U.S. dollars, known as "Covered Stablecoins," are not securities. This decision is a significant step towards establishing a stable regulatory environment for cryptocurrency markets and ensuring compliance with federal laws.

The ruling specifies that Covered Stablecoins are designed and marketed solely for use as a means of making payments, transmitting money, or storing value. They are backed by USD and/or other assets that are considered low-risk and readily liquid, allowing issuers to honor redemptions on demand. These assets are held in a reserve with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation. The SEC emphasized that these tokens are not promoted as profit-generating instruments, a key distinction under federal securities law.

The SEC's clarification is based on two landmark legal standards: the Reves v. Ernst & Young test and the Howey test. Under Reves, the Division found that Covered Stablecoins more closely resemble instruments used for routine commercial transactions rather than speculative notes or debt securities. The agency pointed to the buyer’s non-investment motivation and the lack of trading for profit as key reasons the tokens fall outside the securities definition. The SEC also applied the Howey test, which examines whether an arrangement involves investing money in a common enterprise with an expectation of profit from others’ efforts. The agency found that Covered Stablecoin holders are not investing for returns and that the economic reality is that of a consumer transaction, not an investment contract.



The ruling has significant implications for both investors and issuers. For investors, this clarification means that Covered Stablecoins are not marketed as investment products and do not grant holders interest, profits, governance rights, or ownership claims. For issuers, the SEC's ruling means that they must maintain a fully backed reserve consisting of cash or liquid, low-risk assets such as US Treasury bills. These reserves must be segregated, not used for the issuer’s business operations, and safeguarded from third-party claims. In some cases, issuers must also publish proof-of-reserve attestations to verify solvency and transparency.

The market response to the SEC's ruling has been positive, with BTC rising by 1.8% and ETH by 2.1% post-announcement. This indicates that regulatory certainty promotes wider adoption in finance and boosts institutional confidence. The SEC's action under new leadership reaffirms these assets' commercial nature, with Heath Tarbert, former CFTC Chair, highlighting that asset-backed stablecoins like USDC "are NOT securities."

However, the ruling does not extend to algorithmic or uncollateralized stablecoins, which remain subject to further legal and policy consideration. This could potentially limit the future growth of certain types of stablecoins and DeFi protocols that rely on these tokens. 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.

The SEC's clarification on stablecoins is a significant step towards establishing a stable regulatory environment for cryptocurrency markets. It provides much-needed clarity for stablecoin issuers, fintech firms, and crypto payment providers that have long operated in regulatory uncertainty. The ruling is likely to boost market optimism, promote wider adoption of stablecoins in the broader financial ecosystem, and encourage new stablecoin issuers to enter the market. However, the exclusion of certain types of stablecoins from the ruling could also lead to changes in the DeFi sector and the stablecoin market as a whole.

In conclusion, the SEC's ruling on stablecoins provides a clear regulatory framework for Covered Stablecoins, boosting market optimism and institutional confidence. It ensures that these tokens are treated as commercial tools rather than investment products, which has significant implications for both investors and issuers. The ruling is a key milestone in delineating the regulatory boundaries of digital dollar equivalents and supports a stable regulatory environment for cryptocurrency markets.