SEC Clarifies: Dollar-Backed Stablecoins Not Securities

The U.S. Securities and Exchange Commission (SEC) has recently provided clarity on the regulatory status of certain stablecoins, specifying that those backed one-to-one by the U.S. dollar do not qualify as securities under federal laws. This decision is significant as it offers greater regulatory clarity in the rapidly evolving field of cryptocurrency and blockchain technology.

The SEC has defined "Covered Stablecoins" as those that maintain a stable value relative to the U.S. dollar, backed by low-risk and highly liquid assets held in reserve. These stablecoins are designed for use in payments, money transfers, and as a store of value, rather than as investment products. The SEC's opinion clarifies that the process of minting and redeeming these stablecoins does not fall under the Securities Act or the Securities Exchange Act. Consequently, parties involved in the issuance and circulation of these stablecoins are not required to register with the SEC or comply with U.S. securities laws.

The SEC has emphasized that Covered Stablecoins are marketed as a stable and reliable medium of exchange, with no promise of profits or returns. These stablecoins are not advertised as investments and do not provide holders with any governance rights or financial returns based on the issuer’s performance. This clarification aims to prevent any confusion about their classification as securities, especially in the context of the recently passed STABLE Act, which establishes a regulatory framework for USD-pegged stablecoins.

The SEC's statement also highlights the importance of maintaining a stable value relative to the U.S. dollar. Unlike other cryptocurrencies such as Bitcoin or Ethereum, these stablecoins are not meant to fluctuate in price. Their primary role is to facilitate transactions and act as a stable store of value rather than to generate financial returns for holders.

The SEC applied the Reves and Howey tests to determine whether Covered Stablecoins qualify as securities. Under the Reves test, the SEC concluded that these stablecoins are akin to traditional commercial instruments rather than securities. The Howey test further supports this conclusion, as buyers use these assets for commercial purposes rather than expecting profits. Based on these legal benchmarks, the SEC decided that Covered Stablecoins do not fall under the securities definition under federal securities laws. This decision is grounded in the fact that these stablecoins are primarily used as a medium of exchange and not as an investment vehicle.

This clarification from the SEC comes as Congress continues to work on cryptocurrency legislation. While the SEC’s stance provides clarity on stablecoins, it does not address other digital assets, such as yield-bearing tokens, which may fall under securities regulations. The move aligns with ongoing efforts in the U.S. government to regulate digital assets and cryptocurrency more comprehensively.

However, this new guidance does not apply to all stablecoins. The SEC has stated that algorithmic stablecoins, which use code to maintain their value, stablecoins that offer yield or interest, or coins tied to other assets like gold or foreign currencies, may still be considered securities or face other regulations. This means that while regulated, dollar-backed stablecoins like USDC or PYUSD have gained some regulatory clarity, other types of stablecoins remain in a gray area.

Additionally, the SEC has made it clear that stablecoin companies can generate revenue, such as through interest on their reserves, but they are not permitted to share this revenue with users. This means that users will not earn interest from holding these covered stablecoins. Coinbase CEO Brian Armstrong has expressed dissatisfaction with this aspect, advocating for legislative changes that would allow users to earn interest without the coins being classified as securities.

Circle President Heath Tarbert has praised the SEC's decision, noting that only stablecoins with real backing, such as USDC, qualify under the new guidelines. Meanwhile, Congress is actively working on stablecoin regulations, with bills progressing through both the House and Senate with bipartisan support. As political discussions intensify, the focus is on the upcoming SEC crypto summit, where trading will be a major topic of discussion.