US Securities and Exchange Commission (SEC) States ‘Covered Stablecoins’ Are Not Securities
The US Securities and Exchange Commission (SEC) has stated that its defined “Covered Stablecoins,” which are dollar-backed stablecoins, do not qualify as securities. This implies that they do not need to register with market regulatory agencies, thus providing support to stablecoin issuers and exchanges from the SEC, which may also aid in garnering congressional support for future stablecoin legislation.
What Are Covered Stablecoins as Defined by the SEC?
Covered Stablecoins are designed and marketed to be used as a means of payment, transfer, or storage of value. They are intended to maintain a stable value relative to the US dollar and are backed by US dollars and/or other assets considered low-risk and highly liquid, allowing collateralized stablecoin issuers to redeem on demand. The reserve of these assets is calculated in US dollars, with a value equal to or exceeding the redemption value of the circulating stablecoins. Collateralized stablecoin issuers can mint and redeem an unlimited amount of collateralized stablecoins at a one-to-one ratio with US dollars. In other words, issuers of collateralized stablecoins are always prepared to mint one collateralized stablecoin for each US dollar (or corresponding fraction) and redeem one collateralized stablecoin for one US dollar (or corresponding fraction), with no limit on the quantity of collateralized stablecoins minted or redeemed. Through this fixed price and unlimited minting structure, the market price of collateralized stablecoins is likely to remain stable relative to the US dollar.
Covered Stablecoins Must Not Be Marketed as Investments
The SEC noted in its documentation that Covered Stablecoins must clearly state when marketed:
- The stablecoins have a stable value relative to or corresponding to the US dollar (1:1 value).
- No interest, profits, or other returns are conferred to holders of collateralized stablecoins.
- No investment or other ownership interests in the issuer of the covered stablecoins or any other third party are reflected.
- No governance rights are conferred to holders of covered stablecoins over the issuer of the covered stablecoins or the covered stablecoins themselves.
- No financial benefits or losses are conferred to holders of regulated stablecoins based on the financial performance of the regulated stablecoin issuer or any third party.
Reserves of Covered Stablecoins
Issuers of Covered Stablecoins utilize the proceeds from the sale of stablecoins to purchase assets, which are then held in a centralized account known as the “reserve.” The assets held in the reserve include US dollars and/or other assets considered low-risk and highly liquid, allowing the covered stablecoin issuers to fulfill all redemptions on demand. Furthermore, the reserve accounts must be separate from the assets of the covered stablecoin issuers or any third party.
Additionally, the assets held in the reserve:
- Must not be used for operational or general commercial purposes.
- Must not be lent, pledged, or re-pledged for any reason.
- Must not be held in a manner subject to third-party claims.
Hence, stablecoin issuers will not use the assets held in reserves for trading, speculation, or proprietary investment strategies. However, the income (such as interest) generated from the stablecoin reserve assets may be at the discretion of the collateralized stablecoin issuers, but such income will not be paid to holders of collateralized stablecoins.
SEC Statement May Facilitate Stablecoin Legislation Passage
The SEC indicated in a footnote that a final determination regarding whether stablecoins must register with the SEC will still need to be made based on specific circumstances. This decision may aid stablecoin legislation and the forthcoming Digital Asset Market Structure Bill in gaining passage in Congress. Versions of the stablecoin bill from both the House and Senate have been submitted for committee review, with the House Financial Services Committee scheduled to hold its first hearing on the market structure bill next week.
Risk Warning
Investing in cryptocurrencies involves high risks, as their prices can be highly volatile, and you may lose your entire principal. Please evaluate risks carefully.