HomeCrypto NewsStablecoinsSEC Clarifies Stablecoins Aren't Securities But Leaves Some Questions Open

SEC Clarifies Stablecoins Aren’t Securities But Leaves Some Questions Open

Date:

  • SEC confirms most stablecoins are not securities under U.S. law.
  • Yield-bearing stablecoins may still fall under securities regulation.
  • Stablecoin legislation continues to gain traction in Congress.

On 4 April, the US Securities and Exchange Commission provided a significant viewpoint on stablecoins. This was specifically important as it clarified that most stablecoins are not securities under federal law, affecting their regulation. The clarification strengthens the promising market of stablecoins and paves the way for further advancements at the legislative level.

What Defines a “Covered Stablecoin”?

As pointed out by the SEC, the term “Covered Stablecoins” means the tokens that are backed in stable assets, which includes the US dollar, or low risk reserve and can be redeemed one-for-one with USD. Stablecoins like USDC are instruments for payments and do not have the status of investment products.

The SEC came up with a law stating that stablecoins used solely for payments, money transmission or values storage then they are not securities. The assets must be fully backed by reserves held in safe, liquid assets such as U.S Treasury Bills and the issuer must be fully transparent, they must produce proof of reserve attestations.

Stablecoins’ Role and the SEC’s Ruling

The new stance of the SEC is significant for both the issuers of stablecoins and their users. The ruling only targets fiat-backed stablecoins that can be redeemed for a fixed amount of USD. By drawing this line, the SEC asserts that such tokens fall outside the domain of the registration provisions of the Securities Act of 1933.

As for this type of stablecoin, they are not intended to create profits for investors. The key issues highlighted by the SEC include the nature of these tokens, which point out that they are not used to offer interest or share in profits and are mostly used in transactions rather than investments. This differentiation is important as it brings the distinction in line with the legal tests provided by the SEC to define an asset as a security, such as the Howey and Reves tests.

Yield-Bearing Stablecoins Under Scrutiny

While most stablecoins have defined their legal status, there are still more issues related to tokens that provide rewards to their holders. Despite that, the SEC claims that such tokens can still be classified as securities. In particular, the agency’s decision excludes yield-bearing stablecoins, as they are considered less risky than other stablecoins. Issuers that offer interest stablecoins may need to register with the SEC because this may be considered an investment instrument.

For instance, the SEC stated that in instances where the issuer earns interest on the reserves but fails to distribute the income to the token holders, then the stablecoin cannot be classified as an investment product. Conversely, tokens providing returns or profits that depend on the issuer’s performance may be regulated more severely.

The SEC’s latest ruling does not categorize algorithmic stablecoins, which are not backed by the traditional reserve but operate on a smart contract to maintain the peg of fiat money. Beneath further legal regulation, these stablecoins still remain legal, and the SEC has stated that it will provide more clarity in the future.

The change is likely to assist the stablecoin legislation that is being considered in Congress at the moment. Currently, two bills, the STABLE Act and the GENIUS Act, anticipate providing clear regulations for issuers of stablecoins soon. The growing popularity of stablecoins in the crypto industry puts pressure on lawmakers to develop measures for their regulation.

Raymond Munene
Raymond Munene
Raymond Munene is an experienced cryptocurrency writer with a deep understanding of blockchain technology, cryptocurrencies, and market trends. With years of expertise in crypto, he specializes in crafting insightful and informative articles on a wide range of topics, including DeFi and Web3. His writing aims to educate and engage readers, drawing from his comprehensive knowledge of the crypto industry.

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