SEC Clarifies: Stablecoins Backed by Fiat Not Securities

The U.S. Securities and Exchange Commission (SEC) has made a significant announcement that stablecoins backed one-to-one by liquid, high-quality assets will not be considered securities. This decision means that such stablecoins will not be subject to the usual registration process required for securities. This ruling is a pivotal moment in the regulatory landscape, providing much-needed clarity for investors, financial institutions, and crypto issuers who have been navigating an uncertain environment. It also signals a more balanced approach from the SEC towards digital assets, particularly those tied to the U.S. dollar or other fiat currencies.

On April 4, the SEC staff issued a clarification recognizing that most stablecoins, especially those fully backed by fiat reserves kept in segregated accounts, do not qualify as securities under the Howey Test. The SEC Division of Corporation Finance published its legal view on “Covered Stablecoins,” which are stablecoins backed by real dollars and designed to maintain a fixed value. These fiat-backed digital tokens are fully supported by cash reserves, ensuring a stable price. The statement emphasized that Covered Stablecoins are used for money transfers, value storage, and payments, and are not intended to generate earnings, interest, or grant holders any ownership or voting rights. Instead, they are often referred to as “digital dollars” and are not advertised as means of generating income, which is crucial under U.S. securities law.

The SEC's ruling was based on the Reves and Howey tests, two important legal standards. According to the Reves test, Covered Stablecoins are primarily used in everyday transactions and not for profit-making like regular investments. Consumers use them as a means of payment rather than to make profits. Applying the Howey test, the SEC determined that such tokens are not investments, as owners are not anticipating profits from other people’s labor. Instead, they function like electronic money and are not considered securities.

The CEO of a major cryptocurrency exchange expressed concern about the idea that consumers cannot earn interest on stablecoins. He voiced this concern on a social media platform, stating that U.S. stablecoin legislation should allow consumers to earn interest on stablecoins. He argued that the government should not favor one industry over another and that both banks and crypto companies should be allowed to share interest with consumers.

Under the leadership appointed during the previous presidential administration, the SEC has been working to specify which crypto operations fall outside its jurisdiction. This has included domains such as memecoins, proof-of-work mining, and now, specific stablecoins. The SEC’s Division of Corporation Finance issued a statement saying that some fiat-backed stablecoins used solely for payment, money transfers, or storage of value are not securities. The statement clarified that persons involved in the process of ‘minting’ (or creating) and redeeming Covered Stablecoins do not need to register those transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration.

This guidance, though informal, establishes clear parameters: the tokens must be entirely backed by quality liquid assets and redeemable for dollars on demand. This would presumably disqualify stablecoins such as Tether (USDT), which keeps reserves in crypto and metal, and perhaps adds strings to redemptions. The president of Circle, a major stablecoin issuer, welcomed the SEC's decision, stating that stablecoins backed one-for-one with high-quality liquid assets, like USDC, are not securities. He emphasized that this certainty does not extend to other digital assets just because they call themselves “stablecoins.”

The SEC’s decision is a significant step towards creating more accurate regulations for digital assets. The agency aims to balance encouraging innovation and protecting users by separating fully-backed stablecoins from more speculative crypto commodities. The announcement provides useful guidance for stablecoin issuers, financial institutions, and developers working in a rapidly changing space, although it is not legally enforceable. This move demonstrates that the SEC is willing to adapt classic finance regulations to the digital age, even as unresolved issues around algorithmic stablecoins, interest-bearing tokens, and DeFi platforms remain.