SEC Clarifies: Stablecoins Backed 1:1 by Assets Not Securities

The U.S. Securities and Exchange Commission (SEC) has issued a significant clarification regarding the regulatory status of stablecoins. The SEC announced that stablecoins backed one-to-one by liquid, high-quality assets will not be considered securities, thereby exempting them from the usual registration process. This decision marks a pivotal moment in the regulatory landscape, offering much-needed clarity to investors, financial institutions, and crypto issuers who have been navigating an uncertain environment. The SEC's move indicates a more balanced approach toward digital assets, particularly those tied to the U.S. dollar or other fiat currencies.

The SEC's clarification, issued on April 4, recognizes that most stablecoins, especially those fully backed by fiat reserves kept in segregated accounts, do not qualify as securities under the Howey Test, the legal standard used to assess investment contracts. The SEC Division of Corporation Finance published its legal view on “Covered Stablecoins,” which are stablecoins backed by real dollars and designed to maintain a fixed value. These fiat-backed digital tokens are fully supported by cash reserves, ensuring a stable price. The SEC stated that Covered Stablecoins are primarily used for money transfers, value storage, and payments, and are not intended to generate earnings, interest, or grant holders any ownership or voting rights. They are frequently referred to as “digital dollars” and are not advertised as means of generating income, which is crucial in accordance with U.S. securities law.

The SEC's ruling is based on the Reves and Howey tests, two important legal standards. According to the Reves test, Covered Stablecoins are primarily employed in everyday transactions and not for profit-making like regular investments. Consumers use them as a means of payment rather than to make profits. Applying the Howey test, the SEC determined that such tokens are not investments, as owners are not anticipating profits from other people’s labor. Instead, they function like electronic money and are not considered securities.

Ask Aime: What will be the impact of the SEC's stablecoin clarification on the crypto market?

Coinbase CEO Brian Armstrong expressed his concerns about the SEC's stance on stablecoins, stating that he is “very concerned about this idea that consumers cannot get interest on stablecoins.” He further voiced this concern on X (formerly Twitter), saying, “U.S. stablecoin legislation should allow consumers to earn interest on stablecoins. The government shouldn’t put its thumb on the scale to benefit one industry over another. Banks and crypto companies alike should both be allowed to, and incentivized to, share interest with consumers.”

The SEC's decision is part of a broader regulatory landscape where the agency has been specifying which crypto operations fall outside its jurisdiction. This includes domains such as memecoins, proof-of-work mining, and now, specific stablecoins. The SEC's Division of Corporation Finance issued a statement saying that some fiat-backed stablecoins used solely for payment, money transfers, or storage of value are not securities. This means that participants in issuing or redeeming these “Covered Stablecoins” do not require registration with the SEC. However, the tokens must be entirely backed by quality liquid assets and redeemable for dollars on demand. This would presumably disqualify stablecoins such as Tether (USDT), which keeps reserves in crypto and metal, and perhaps adds strings to redemptions.

Heath Trabet, the president of Circle, wrote on his LinkedIn post, “The SEC just drew a clear line: stablecoins backed one-for-one with high-quality liquid assets—like USDC—are NOT securities. This certainty does not extend to other digital assets just because they call themselves “stablecoins.”

The SEC’s decision is an important milestone toward creating more accurate regulations for digital assets. The agency is trying to strike a balance between encouraging innovation and protecting users by separating fully-backed stablecoins from more speculative crypto commodities. The announcement offers useful guidance for stablecoin issuers, financial institutions, and developers working in a rapidly changing space, although it is not legally enforceable. This move proves that the SEC is not afraid to tailor classic finance regulations to the age of technology—albeit not slowing progress—even though there are lingering unresolved issues around algorithmic stablecoins, interest-bearing tokens, and DeFi platforms.