US SEC says some stablecoins aren’t securities

Getting your Trinity Audio player ready...

The United States Securities and Exchange Commission (SEC) continues to toe the party line in the Trump 2.0 era, with two more concessions toward the U.S. President’s pro-crypto agenda in as many days. This time, they came in the form of a review of agency statements on digital asset risk and an announcement that certain stablecoins are not securities.

‘Covered’ stablecoins are not securities

On April 4, the SEC’s Division of Corporation Finance issued a statement on stablecoins, outlining how some stablecoins will not be considered as securities. The stablecoins in question were labelled “covered stablecoins” and defined as:

“Crypto assets designed and marketed for use as a means of making payments, transmitting money, or storing value… designed to maintain a stable value relative to USD and are backed by USD and/or other assets that are considered low-risk and readily liquid so as to allow a Covered Stablecoin issuer to honor redemptions on demand.”

These low-risk and readily liquid assets must also be held in reserve with a USD value that meets or exceeds the redemption value of the stablecoins in circulation. Such low-risk, liquid assets included USD cash equivalents, demand deposits with banks or other financial institutions, U.S. Treasury securities, and money market funds.

The SEC further clarified that precious metals or other digital assets are not considered low-risk, readily-liquid assets. This would rule out algorithmic stablecoins—that maintain price stability through automated, algorithm-driven supply adjustments rather than being backed by real-world assets—and also stablecoins such as Tether (USDT), the world’s largest by market cap, whose reserves include a substantial amount of BTC.

For these stablecoins that don’t qualify as ‘Covered’, the SEC didn’t specify whether they are securities.

For stablecoins that fit the description of ‘Covered,’ the regulator said transactions with those assets “do not involve the offer and sale of securities.” Thus, the agency added, “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.”

Whether any given digital asset qualifies as securities has been the subject of much vociferous debate in the U.S. over the past few years, in and out of court. This debate revolves around the interpretation of the ‘Howey Test.’

Howey is a long standing-legal precedent that emerged from the 1946 Supreme Court case, SEC v. W.J. Howey Co., which established that a given asset offering amounts to an investment contract under the U.S. securities legislation and, therefore, is a security if:

• It is an investment of money;
• In a common enterprise;
• With an expectation of profits;
• Solely from the efforts of others.

Based on this criteria, last Friday’s SEC statement argued that ‘Covered stablecoins’ are not an investment, as buyers are not motivated to purchase and own them for profit, and they lack the expectation of profit due to being non-yield bearing.

“Rather, they are marketed as a stable, quick, reliable and accessible means of transferring value, or storing value and not for potential profit or as investments,” said the SEC. The regulator also suggested that Covered stablecoins have “risk reducing features” that make protection via securities regulations unnecessary.

However, this latter point was challenged by Democratic SEC Commissioner Caroline Crenshaw, who felt the need to voice her dissent on a couple of aspects.

“The statement’s legal and factual errors paint a distorted picture of the USD-stablecoin market that drastically understates its risks,” said Crenshaw, one of her main concerns being that while stablecoins should be redeemable, retail holders cannot do so directly.

“The fact that intermediaries conduct most retail USD-stablecoin distribution and redemption significantly diminishes the value of the issuer actions,” explained Crenshaw. “It is the intermediaries, not the issuers, whose actions matter.”

She added that if stablecoin holders redeem coins through an intermediary, “they are paid by the intermediary, not from the issuer’s reserve. The intermediary is not obligated to redeem a coin for $1 and will instead pay the holder the market price.” 

Therefore, Crenshaw refuted the Division of Corporation Finance’s claims that stablecoin holders have a “right” to “redemption for USD on a one-for-one basis.”

To underscore her complaint, Crenshaw wrote that stablecoins are also “uncollateralized, uninsured, and laden with risk at every step of their multi-layer distribution chain. They are risky business.” 

Unfortunately—depending on your perspective—Crenshaw is now the lone Democrat commissioner at the SEC, and thus, her objections will likely fall on deaf ears. Her Republican colleagues, fellow Commissioner Hester “crypto mom” Peirce and Acting SEC Chair Mark Uyeda, are both very much singing from President Trump’s digital asset hymn sheet.

Uyeda has been making the most of his brief time in the sun before the new permanent SEC Chair, Paul Atkins, takes his seat. Atkins faced confirmation hearings last month and was approved by the Senate Banking Committee on April 3. He will face a Floor vote next, which he is all but guaranteed to pass.

While this process rattles on, Acting Chair Uyeda directed SEC staff on Saturday to review several staff statements concerning digital asset regulation, including letters that warn investors of risks from investing and another related to guidance for applying the Howey test to digital assets.

In the directive, issued in accordance with Executive Order 14192—titled “Unleashing Prosperity Through Deregulation”—and following recommendations from the Department of Government Efficiency (DOGE), Uyeda noted that the staff statements will be examined to determine if they should be “modified or rescinded” to be “consistent with current agency priorities.”

Besides two statements relating to COVID-19 considerations, all the key documents slated for review revolved around digital asset policy.

First amongst these was a statement regarding the framework for “investment contract” analysis, which was published in 2019 and detailed guidance for assessing whether a digital asset is considered a security under the Howey test.

As the Howey test states, an asset is a security if it is ‘an investment of money, in a common enterprise, with an expectation of profits solely from the efforts of others’. This may seem cut-and-dry, but many digital asset players have argued that certain digital assets, such as Bitcoin or XRP, don’t fit the bill, while the SEC previously argued otherwise.

The interpretation of Howey matters because if an asset does qualify as a security, then anyone issuing or dealing in said asset must register it with the SEC or risk being fined for dealing in an unregistered security—the source of many a lawsuit during Gary Gensler’s reign as SEC chair.

Another document under review is a 2021 SEC staff statement that “strongly encourages” investors in the BTC futures market to “consider the risk.” The statement highlighted the speculative nature of BTC futures, stressing the risk of market manipulation, liquidity constraints, and volatility, particularly for mutual funds.

“Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment,” said the SEC at the time. “As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market.”

The vocally pro-crypto acting SEC chair is presumably worried such language will scare off investment in digital assets.

Similarly, Uyeda put up for review guidance issued in late 2022 following several high-profile digital asset bankruptcies, notably FTX. That guidance urged companies exposed to digital asset markets to provide investors with “specific, tailored disclosure about market events and conditions,” including custody, liquidity, reputational damage, and regulatory scrutiny risks. 

Also up for review are a Risk Alert from February 2021, warning that “a number of activities related to the offer, sale and trading of digital assets that are securities present unique risks to investors” and a 2020 statement from the staff of the SEC’s Division of Investment Management inviting industry feedback on—and thus, implicitly bringing into question—a Wyoming Division of Banking letter from the same year allowing state-chartered trust companies to custody digital assets.

Acting Chair Uyeda did not direct staff on how or whether the various statements should be modified or rescinded, but since the directive came under the auspices of President Trump’s “Unleashing Prosperity Through Deregulation” executive order, the implications for the preferred result of the review appear obvious.

Watch: Stablecoins with Daniel Lipshitz