SEC Clarifies: USD-Backed Stablecoins Not Securities

The U.S. Securities and Exchange Commission (SEC) has provided clarity on the regulatory status of certain stablecoins, specifically those backed one-to-one by the U.S. dollar. The SEC has determined that these stablecoins do not qualify as securities under federal laws, offering greater regulatory clarity in the expanding field of cryptocurrency and blockchain technology.

The Division of Corporation Finance within the SEC defined "Covered Stablecoins" as those that maintain a stable value relative to the U.S. dollar. These tokens are backed by assets held in a reserve, which are low-risk and highly liquid, ensuring that they can always be redeemed for U.S. dollars at a one-to-one ratio. The SEC noted that such stablecoins are intended for use in payment, money transfer, and value storage rather than as investment products. The process of minting and redeeming these stablecoins does not fall under the Securities Act or the Securities Exchange Act, meaning that parties involved in their issuance and circulation are not regulated by U.S. securities laws or required to register with the SEC.

The SEC further clarified 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 and comes after the U.S. passed the STABLE Act, establishing a regulatory framework for USD-pegged stablecoins.

The SEC’s statement also emphasizes the importance of maintaining a stable value relative to the U.S. dollar. Unlike other cryptocurrencies such as Bitcoin or Ethereum, these stablecoins are designed to have fixed values and 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 used two legal benchmarks, the Reves and Howey tests, to determine if Covered Stablecoins qualify as securities. Under the Reves test, the SEC held that these stablecoins are akin to traditional commercial instruments rather than securities. The Howey test emphasizes that buyers use these assets for commercial reasons with the expectation of gains other than in the form of profits. Based on these tests, the SEC concluded that Covered Stablecoins do not fall under the securities definition under federal securities laws. This decision is based on the fact that they are primarily used as a medium of exchange and not as an investment vehicle backed by readily saleable assets.

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.