The Securities and Exchange Commission (SEC) recently declared that stablecoins backed by cash reserves and redeemable for US dollars are not securities under federal law. This announcement provides legal clarity for stablecoin issuers, fintech firms, and crypto payment providers who have been operating in regulatory uncertainty. These stablecoins, known as Covered Stablecoins, are designed for payments, money transmission, and value storage, rather than as investment products.
Covered Stablecoins do not offer interest, profits, governance rights, or ownership claims to holders, and are primarily marketed as digital dollars. The SEC’s decision was based on the Reves v. Ernst & Young test and the Howey test. Under Reves, the agency determined that Covered Stablecoins are used for commercial transactions, not as speculative notes or debt securities. The Howey test also revealed that holders of Covered Stablecoins are not investing for returns, but engaging in consumer transactions.
For a stablecoin to be classified as a Covered Stablecoin, it must be redeemable for USD at a fixed price and backed by cash or liquid assets such as US Treasury bills. These reserves must be segregated, safeguarded, and not used for the issuer’s business operations. While Covered Stablecoins can trade on secondary markets, their price is typically stabilized through arbitrage by designated parties.
The SEC emphasized that holders of Covered Stablecoins do not receive any form of yield or share in the earnings generated from reserve assets. While issuers may earn interest on reserves, those earnings are retained by the issuer and not distributed to token holders. This lack of financial benefit distinguishes Covered Stablecoins from investment products, as they do not offer an expectation of profit derived from the efforts of others.
The SEC’s announcement only pertains to stablecoins backed by cash reserves, not algorithmic or uncollateralized stablecoins. However, this development marks a significant milestone in outlining the regulatory boundaries of digital dollar equivalents. It clarifies that stablecoins used for utility purposes and not marketed for investment returns are not subject to securities laws. Coverage Stablecoins provide a convenient and reliable digital payment solution, offering potential benefits for the broader financial ecosystem.
