On April 4, 2025, the staff of the U.S. Securities and Exchange Commission (SEC or “Commission”) Division of Corporation Finance (“Staff”) issued a statement on stablecoins (the “Stablecoin Statement”), outlining the Staff’s view that certain stablecoins, referred to as “Covered Stablecoins,” are not securities under the federal securities laws and therefore not subject to registration under the federal securities laws. Specifically, the Stablecoin Statement focuses on crypto assets that are designed to maintain a stable value relative to USD and are designed and marketed solely for use in commerce as a means of making payments, transmitting money, or storing value. Applying Supreme Court precedent, the Staff concluded that Covered Stablecoins are not securities under the standards announced in Reves v. Ernst & Young, 494 U.S. 56 (1990) (“Reves”) and SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey”).
The Stablecoin Statement discusses the (1) characteristics, (2) marketing, and (3) stablecoin reserves of Covered Stablecoins. In the view of the Staff, if a particular stablecoin met the indicia set out in each of these three areas, that stablecoin was not offered or sold as a security and therefore a “Covered Stablecoin” for the purpose of the Stablecoin Statement.
The Stablecoin Statement emphasizes the stability of Covered Stablecoins by highlighting certain key aspects, such as their fixed price and the issuer’s readiness to mint or redeem an unlimited quantity of the stablecoin.
The Staff specifically notes that Covered Stablecoins are low-risk and liquid, given they are backed by USD and/or other stable assets held in reserve on a one-for-one basis corresponding to the value of such assets. According to the Staff, this enabled issuers and designated intermediaries to mint and honor redemptions on a one-for-one basis with USD at any time and in unlimited quantities.
Notably, the Staff clarified that Covered Stablecoins do not include those that rely on algorithms to manage variable reserves in an attempt to maintain a stable value. Without making reference to prior enforcement actions, the Staff appears to imply that, whether or not marketed as stablecoins, digital assets that rely on methods of maintaining value other than direct reserves are not Covered Stablecoins.
Fluctuations in the secondary market price for Covered Stablecoins, as compared to its redemption price, did not alter the Staff’s analysis or conclusions. In the Staff’s view, these fluctuations create an opportunity for designated intermediaries or other holders that are eligible to directly mint and redeem the Covered Stablecoins to engage in arbitrage to keep a stablecoin’s market price stable relative to the redemption price, which the Staff suggested is distinct from purchasing an asset with an intent to profit.
According to the Stablecoin Statement, Covered Stablecoins are marketed for use in commerce, not as an investment. The Staff includes the following examples of marketing statements that are sometimes used to promote Covered Stablecoins.
A Covered Stablecoin:
The Stablecoin Statement also mentions that Covered Stablecoin marketers often refer to the asset as a “digital dollar.” In the Staff’s view, marketing Covered Stablecoins in this way are indicia that Covered Stablecoins are not offered or sold as securities.
The Staff also notes in the Stablecoin Statement that the proceeds from an issuer’s sales of Covered Stablecoins are used to acquire assets that are held in a pooled account (“Reserve”) segregated from and not commingled with the issuer’s other assets or assets of a third party. The assets held in the Reserve are used to back the amount of outstanding Covered Stablecoins on at least a one-for-one basis and are only used to pay redemptions, even though an issuer may realize earnings on the assets held in the Reserve.[1]
In the Stablecoin Statement, the Staff clarifies that the offer and sale of Covered Stablecoins do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Staff reached this conclusion based on a legal analysis of Covered Stablecoins under the tests set forth in Reves and Howey.
Reves provides the “family resemblance” test used to overcome the presumption that a note or other debt instrument is covered under the Securities Act’s and Exchange Act’s definition of “security.” The four prongs that must be met under Reves are: (i) motivations of seller and buyer, (ii) plan of distribution of the instrument, (iii) reasonable expectations of the investing public, and (iv) risk-reducing features. The Staff’s analysis concludes that the offer and sale of Covered Stablecoins are to advance a commercial or consumer purpose rather than an investment purpose because (1) sellers use the proceeds to fund a Reserve and buyers are not motivated by an expected return on their funds; (2) Covered Stablecoins are distributed in a manner that does not encourage trading for speculation or investment; (3) a reasonable buyer would likely expect that Covered Stablecoins are not investments; and (4) the availability of a Reserve adequately funded to fully satisfy redemptions on demand is a risk-reducing feature.
The Staff also applies the Howey test, which is used to analyze whether instruments that are not listed in Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act are “investment contracts.” Under Howey, an instrument is an investment contract, and therefore a security, if there is (i) an investment of money in (ii) a common enterprise with (iii) the expectation of profits (iv) to be derived from the efforts of others. The Staff concludes that buyers do not purchase Covered Stablecoins with a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others because these instruments are not marketed as investments or with any emphasis on the potential for profit. Instead, in the Staff’s view, buyers purchase Covered Stablecoins to use or consume “digital dollars” in a similar manner to USD. Therefore, Covered Stablecoins are not investment contracts under Howey.
Based on the Staff’s analysis, any person involved in minting and redeeming Covered Stablecoins, whether they are an issuer, intermediary, or end-user, is not required to register those transactions with the SEC under the Securities Act or will fall within one of the Securities Act’s exemptions from registration.
SEC Commissioner Caroline A. Crenshaw issued a statement the same day offering a counter to the Stablecoin Statement. Commissioner Crenshaw critiqued the Stablecoin Statement based on her view that that the Staff paints a distorted picture of the risk associated with the USD-stablecoin market and incorrectly concluded that the reserve is a risk-reducing feature under the Reves test. She flags several areas of risk that the Staff did not address in the Stablecoin Statement. For example, Commissioner Crenshaw posited that as an estimated 90% of USD-stablecoins in circulation are distributed to the public only through intermediaries who sell them on the secondary market, and holders of such stablecoins can redeem them only through the intermediary, with no contractual recourse against the issuer, who has no “redemption obligations” to retail holders. Taking issue with the Staff’s characterization of Covered Stablecoins as “digital dollars,” Commissioner Crenshaw highlighted that major run events have already occurred with USD-stablecoins, with significant consequences for the broader stablecoin market and the traditional banking system, and intermediaries and/or issuers were unable to honor all redemption requests in real time.
Although the Stablecoin Statement is not a rule, regulation, or statement of the Commission, it suggests that the current Commission is unlikely to pursue enforcement actions related to Covered Stablecoins based on the Staff’s view that they are not securities under the federal securities laws. Neither the Staff’s nor Commissioner Crenshaw’s statements addressed what, if any, disclosure requirements would allow prospective users of stablecoins to understand whether such stablecoins qualified as Covered Stablecoins. Importantly, the Staff did not address the applicability of laws relating to commodities, money transmission, banking, or consumer protection that may arise from the minting, distribution, arbitrage, custody, exchange, or use of stablecoins (regardless of their covered status under the Stablecoin Statement). Market participants should proceed with caution before engaging in activities involving stablecoins.
[1] The Staff does not address what other regulatory implications this economic interest may create. The Staff also notes that the extent to which the Reserve is or is not subject to the claims of the issuer’s creditors may impact whether there are sufficient risk-reducing features under Reves. The Staff, however, does not provide a brightline rule for whether there are sufficient risk-reducing features, instead stating that where a stablecoin issuer holds the Reserve funds in a bankruptcy-remote account or entity for the sole benefit of Covered Stablecoin holders, the features would be present, but these are not mutually exclusive methods nor is it always obvious if these methods are being employed.