Rebalancing the scales? SEC provides bright-line guidance on 'covered stablecoins'

The Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) has released an unexpected and important statement clarifying its position on certain types of stablecoins, marking a significant development in the regulatory landscape for crypto assets and a dramatic shift away from the lack of guidance which occurred under the previous SEC leadership.

The statement declares that the offer and sale of 'covered stablecoins' will not be considered by the SEC to involve the offer and sale of securities under the US federal securities laws. This is dramatic shift from the past chair's view of stablecoins, who described them as little more than poker chips.

This statement makes clear that the significant use of existing stablecoins will not be at threat of US regulatory action. Guidance from the SEC is non-binding but gives the market a clear understanding of what the SEC views as acceptable or not-acceptable behaviour.

Covered Stablecoins

The statement defines 'covered stablecoins' as:

1. crypto assets designed and marketed for use as a means of making payments, transmitting money, or storing value;

   
   

2. issued and redeemed 1:1 with US dollars;

   
   

3. backed by USD and/or other assets considered low-risk and readily liquid (e.g. US treasuries) so redemptions on demand are able to be honoured.

   
   

The redemption requirement is extended to permit redemption only by designated intermediaries (so the underlying issuer need not offer redemption to all and sundry).

Not securities under US federal law

The SEC has a long history of regulation by enforcement, asserting that the offer of cryptocurrencies has involved unregistered issuance of securities, and this change brings covered stablecoins in from the cold. The SEC uses the Reves test (for notes and debt instruments) and the Howey test (for investment contracts).

Reves Test

In the Reves decision, the US Supreme Court found a presumption that a note, being an instrument listed in the US Securities Act, is a security, but that this presumption could be rebutted if the note strongly resembles a type of note issued in connection with typical commercial transactions. This 'family resemblance' test involves looking at:

1. Motivations of Seller and Buyer. What prompts a reasonable seller and buyer to enter into the transaction;
   

2. Plan of Distribution of the Instrument. Whether the note is an instrument in which there is a “common trading for speculation or investment.”;

   
   

3. Reasonable Expectations of the Investing Public. Whether the investing public holds any reasonable expectation that the note is to be a regulated security; and

   
   

4. Risk-Reducing Features. Whether there is some feature of the note, such as a regulatory scheme, which significantly reduces the risk in the note, making application of the Securities Act unnecessary

The statement concludes that covered stablecoins are not securities under Reves because:

1. They are purchased for stability and use in commercial transactions, not profit expectations;

   
   

2. Their fixed-price, unlimited mint-redeem structure minimizes speculation;

   
   

3. They are marketed as payment tools, not investments and do not entitle the holder to any interest, profit or other returns or governance rights;

   
   

4. The reserve structure provides risk-reducing features

Howey Test

The Howey test is famously well known among those in crypto, and specifically considers whether there is:

1. an investment of money;

   
   

2. in a common enterprise; with

   
   

3. a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

The Guidance notes this test looks to the 'economic realities' of the transaction, and in applying that, the motivation of investors (those looking for returns) and consumers (looking to use or consume the item purchased) is important and draws a line between when securities laws apply and when they do not. Covered stablecoins are not considered by the SEC to be securities under Howey for reasons including:

1. buyers do not purchase covered stablecoins with any reasonable expectation of profit from the entrepreneurial or managerial efforts of others; and

   
   

2. covered stablecoins are not marketed to suggest otherwise; and

   
   

3. buyers are motivated to use or consumer covered stablecoins in the same way they would use US dollars.

Firm Dissent

A dissenting opinion was published at the same time, with a lone SEC Commissioner attacking 'proof of reserves' published by stablecoin issuers and stating that the guidance 'fails to unpack the consequences of this market structure and how it affects risk'. The dissent does not give legal analysis on the position put forward in the guidance, but criticises privately issued stablecoins generally.

Global regulatory developments

While the US SEC has clarified its approach, with the STABLE Act and the GENIUS Act currently being considered by Congress to regulate stablecoins, other jurisdictions are taking different regulatory paths:

Europe's Strict Stance

The European Union's Markets in Crypto Assets (MiCA) regulation has expressly outlawed yield-bearing stablecoins. This regulatory shift has already prompted action from major players - Tether announced discontinuation of their EUR-denominated stablecoin, with users required to exit by November 2025. Meanwhile, exchanges have begun delisting USDT, and Coinbase has terminated rewards for EU users holding USDC.

Australia's Payment System Approach

Australia is planning to regulate stablecoins under its payment systems framework, focusing on their function as digital payment instruments rather than securities. This approach aligns with Australia's recently announced strategy to provide licensing for the crypto industry. The Treasury has stated that it will not require exchanges dealing in stablecoins to hold a markets licence in order to do so.

Growing Institutional Interest

Despite regulatory challenges, traditional finance institutions are rushing to enter the stablecoin space. The global stablecoin market has reached approximately US$210 billion, with major players like Tether (USDT) and Circle (USDC) dominating the landscape.

Major banks and fintech companies including Bank of America, PayPal, Standard Chartered, Revolut, and Stripe have announced plans to launch or expand stablecoin offerings. Even Klarna's CEO has announced their intention to "embrace crypto" after being "the last large fintech in the world" to do so.

What's Next?

The statement from the SEC is rightly interpreted as a positive endorsement of crypto and creates a safe space for non-yield generating stablecoins, such as US issued USDC, while Congress considers codified regulation. As Circle has announced an upcoming IPO, this will give more confidence to investors backing the growth of stablecoins, which in turn will likely drive greater use of smart contracts and use of blockchain technology.

As traditional finance continues to embrace stablecoins, we can expect further regulatory developments and market growth in this rapidly evolving sector. The race to capture a share of the cross-border payments market through stablecoins is starting to heat up.

By Michael Bacina and Steven Pettigrove