The SEC's Division of Corporation Finance has stated that some stablecoins pegged to the dollar are not regarded as securities under federal law. The statement, which marks the first of its kind, states that "Covered Stablecoins" – digital assets backed entirely by low-risk reserves and redeemable at par with U.S. dollars – reject being defined under the securities regulation. The statement follows intense debate, with the dissenting opinion of Commissioner Caroline Crenshaw outlining grave risks to the market that have been disregarded.
Key Takeaways:
"Covered Stablecoins" must be pegged by a stable 1-to-1 exchange rate against USD, be fully backed by low-risk assets, have indefinite redemption rights, and be issued for payment purposes as opposed to investment purposes. SEC staff analyzed these instruments through the Reves and Howey tests. Concluding that these instruments are predominantly used for commerce rather than profit-seeking like securities registration.
Commissioner Crenshaw publicly challenged the staff's interpretation. Contending that it mischaracterizes how stablecoins truly operate. With respect to the strong dissent, she articulated that more than 90% of stablecoins are circulating through intermediaries where users have no direct redemption rights against the issuers. "Retail coin holders do not, as staff claims, have a 'right' to 'redemption for USD on a one-for-one basis,'" she noted.
| Issue | SEC Staff Position | Crenshaw's Critique | Market Impact |
| Redemption Rights | Direct 1:1 redemption | Most Users have no direct redemption rights | Creates a false sense of security |
| Reserve Protection | Risk-reducing reserve assets | Uncollateralized and uninsured for retail users | Bankruptcy protections unclear |
| Price Stability | Maintained through arbitrage | Dependent on intermediary actions, not issuers | Stability mechanisms opaque |
| Marketing | Not promoted as investments | Often marketed as "digital dollars", misleadingly | May encourage riskier practices |
With the regulatory clarity now established. Compliant stablecoin issuers might feel less restricted in their operations with regards to securities enforcement, greatly increasing growth opportunities in payment applications, cross-border transfer, and DeFi integration. Major issuers may change their operations to conform to the 'Covered Stablecoin' definition, leading to an increase in possible uses.
Some important questions remained about retail user protections with direct renunciation of redemption rights and applicable bankruptcy protections. Their position contains uncertain recourse, should intermediaries fail. "The proof of reserves used for marketing by issuers is not designed to and generally offers no reliability for assurance on the provided content," Crenshaw reported.
This statement represents the views of staff rather than any formal Commission rulemaking. So there is legal space for changes in the future. Congress could also step in to set up a more credible framework. In the meantime, stablecoin issuers will probably consider this guidance in redefining their economic models, and exchanges and other intermediaries will be expected to further clarify their redemption procedures.
The SEC's stance sets an avenue for the growth of stablecoins outside the definitions of securities regulation. Yet Commissioner Crenshaw's grave warnings remind us that such growth will come with perils, especially dangers that retail users may not understand. An enduring gulf between regulatory theory and market practice will be a pressing concern for investors going forward.