The Division of Corporation Finance under the US Securities and Exchange Commission (SEC) has released a statement confirming that stablecoins are not subject to securities laws. It writes, “It is the division’s view that the offer and sale of covered stablecoins, in the manner and under the circumstances described in this statement, do not involve the offer and sale of securities.” This is based on the definition of securities under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Accordingly, those involved in creating and redeeming covered stablecoins do not need to register those transactions with the SEC nor be exempted.
In coming to its decision, the regulator applied the family resemblance test and Howey test to determine whether stablecoins are securities.
The Howey test considers an asset to be a security as long as it involves an investment of money into a common enterprise with the expectation of profit from the effort of others.
The family resemblance test compares covered stablecoin to notes and other debt instruments. Because covered stablecoins share characteristics with these instruments, which are defined as securities under the Securities Act and Securities Exchange Act, there are arguments for treating them similarly. The family resemblance test considers four factors in defining securities: motivations of buyer and seller; plan of distribution of the instrument; reasonable expectation of the investing public; and risk-reducing features.
Not for profit
Based on both tests, the SEC has concluded that covered stablecoins are not securities. It writes, “Covered stablecoins are crypto assets designed and marketed for use as a means of making payments, transmitting money, or storing value. They are designed to maintain a stable value relative to USD and are backed by USD and/or other assets that are considered low-risk and readily liquid so as to allow a covered stablecoin issuer to honour redemptions on demand.”
Because covered stablecoins tend to have a stable price, they are not designed for speculation or investment. “Buyers purchase covered stablecoins for their stability and attendant use in commercial transactions or as a store of value.” They “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.”
