In an effort to provide greater clarity on the application of federal securities laws to crypto assets, the US Securities and Exchange Commission (SEC) Division of Corporation Finance has issued a statement regarding certain types of crypto assets commonly referred to as “stablecoins.”
Specifically, this guidance addresses stablecoins that are designed to maintain a stable value relative to the USD on a one-for-one basis, are redeemable for USD, and are backed by low-risk, readily liquid assets held in reserve.
The SEC’s statement offers an important clarification for the crypto industry, distinguishing “Covered Stablecoins” from securities under U.S. law.
The Division has concluded that the offer and sale of Covered Stablecoins, as described in the statement, do not constitute the offer and sale of securities under the Securities Act of 1933 or the Securities Exchange Act of 1934.
As a result, individuals involved in the creation (minting) and redemption of these stablecoins will not be required to register those transactions with the SEC.
Covered Stablecoins are crypto assets designed and marketed for use in making payments, transmitting money, or storing value, with a stable value relative to USD.
They are fully backed by assets that are low-risk and liquid, ensuring the issuer can honor redemptions on demand at a one-for-one basis with USD.
The assets held in reserve are carefully managed and are not used for speculative or business purposes by the issuer.
These stablecoins may be issued by the issuer or through designated intermediaries, and secondary market trading of Covered Stablecoins is possible, with price fluctuations generally regulated by arbitrage mechanisms between market prices and redemption prices.
The SEC evaluated Covered Stablecoins under two key legal tests: the Reves “family resemblance” test and the Howey “investment contract” test.
The Division found that Covered Stablecoins do not meet the criteria for being classified as securities. Under the Reves analysis, the Division determined that buyers of Covered Stablecoins are not motivated by profit or investment returns, but rather by their use in commercial transactions, such as payments or store-of-value applications.
This aligns with the motivations of typical consumers, not investors seeking financial returns.
Furthermore, under the Howey test, the SEC concluded that Covered Stablecoins are not investment contracts.
Consumers purchase them for their utility in everyday transactions, not with an expectation of profits derived from the efforts of others.
Covered Stablecoin issuers maintain a reserve of USD and/or low-risk liquid assets to ensure that they can fully satisfy redemption requests.
The assets in the reserve are kept separate from the issuer’s operational funds and are not used for speculative trading or other business activities.
In some cases, issuers also provide “proof of reserves” to demonstrate their ability to honor redemptions.
The SEC’s guidance reinforces the understanding that Covered Stablecoins, when used as designed for payments, money transfers, or value storage, do not fall within the scope of federal securities laws.
This clarification provides much-needed certainty for businesses and consumers engaged in the use of stablecoins and aims to support the continued development of the crypto asset industry while ensuring proper regulatory compliance.
Featured image credit: edited from freepik
