The Securities and Exchange Commission (SEC) recently made a significant announcement regarding the regulatory treatment of stablecoins backed by cash reserves. In a public statement on April 4, the SEC’s Division of Corporation Finance clarified that stablecoins redeemable for US dollars on a one-to-one basis are not considered securities under federal law.
These stablecoins, referred to as “Covered Stablecoins,” are designed to maintain price stability through fully reserved dollar holdings. The SEC emphasized that these tokens are intended for use in payments, money transmission, and value storage, rather than as investment products. They do not grant holders any interest, profits, governance rights, or ownership claims.
The Division’s legal views were based on two key tests: the Reves v. Ernst & Young test and the Howey test. Under the Reves test, Covered Stablecoins were found to resemble instruments used for routine commercial transactions rather than speculative notes or debt securities. The Howey test, which examines whether an arrangement involves investing money in a common enterprise with an expectation of profit, also indicated that Covered Stablecoin holders are not investing for returns.
To qualify as Covered Stablecoins, these tokens must be redeemable for USD at a fixed price, at any time, and in unlimited quantities. Issuers are required to maintain a fully backed reserve consisting of cash or liquid, low-risk assets such as US Treasury bills. These reserves must be segregated, safeguarded from third-party claims, and in some cases, issuers must provide proof-of-reserve attestations for transparency.
While Covered Stablecoins may trade on secondary markets, their price stability is typically maintained through arbitrage. If the market price deviates from the peg, designated parties can mint new tokens or redeem existing ones to adjust the supply and demand.
One key distinction highlighted by the SEC is that holders of Covered Stablecoins do not receive any form of yield or share in the earnings generated from reserve assets. This absence of financial benefit removes the expectation of profit element from the Howey test.
It’s important to note that the SEC’s statement only applies to fiat-backed stablecoins used for utility purposes. Tokens that promise returns, profit-sharing, or exposure to an issuer’s financial performance may still be subject to securities laws. The SEC’s announcement provides clarity for stablecoin issuers, fintech firms, and crypto payment providers operating in regulatory uncertainty.
While the regulatory boundaries of digital dollar equivalents continue to evolve, the SEC’s position on Covered Stablecoins sets an important precedent for the industry. This clarification will likely impact how stablecoin projects are structured and marketed in the future.