What Kind of Stablecoin Is Not a Security? Full Text of U.S. SEC Stablecoin Regulation
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What Kind of Stablecoin Is Not a Security? Full Text of U.S. SEC Stablecoin Regulation
Buyers of compliant stablecoins seek their stability and use them as a means of payment or store of value in commercial transactions.
Navigating Web3 tides with focused insightsAuthor: Division of Corporation Finance, U.S. Securities and Exchange Commission
Translation: Aki Chen, Wu Shuo Blockchain
Introduction
To further clarify the application of U.S. federal securities laws to digital assets [1], the Division of Corporation Finance (the "Division") provides its views regarding a specific category of digital assets commonly known as "stablecoins." This statement applies only to stablecoins that meet all of the following criteria:
1. Designed to maintain a stable 1:1 peg to the U.S. dollar (USD),
2. Redeemable at a 1:1 ratio for U.S. dollars (i.e., one stablecoin can be exchanged for one USD),
3. Backed by reserves of low-risk, highly liquid assets whose dollar value is sufficient at all times to cover redemption obligations for all outstanding stablecoins.
As discussed below, we refer to such stablecoins covered by this statement as “Covered Stablecoins.”
Overview of Stablecoins
A stablecoin is a type of digital asset designed to maintain a stable value relative to a reference asset—such as a fiat currency like the U.S. dollar, a commodity like gold, or a basket of assets. Typically, stablecoins are intended to track the value of the reference asset on a 1:1 basis. Different mechanisms may be used to maintain price stability: in some cases, stablecoins are backed by reserves, with assets held in reserve ensuring the 1:1 exchangeability between the stablecoin and the reference asset; in other cases, stability is maintained through non-reserve mechanisms, such as algorithms that adjust the supply of the stablecoin based on changes in market demand [3].
Due to differences in stabilization mechanisms and reserve assets (if applicable), the risks associated with various stablecoins vary significantly. Stablecoin issuers typically offer and sell stablecoins at a price equal to the value of the reference asset (1:1). For example, when the reference asset is the U.S. dollar, an issuer sells one stablecoin for one USD; if fractional units are supported, the valuation remains proportionally equivalent (e.g., 0.5 stablecoins for $0.50). When users redeem their stablecoins, issuers typically use reserve assets to fulfill redemptions at a 1:1 ratio back into the reference asset.
1) The Division’s Position on Covered Stablecoins [4]
Based on the operational model and conditions described in this statement, the Division believes that the issuance and sale of Covered Stablecoins do not constitute offers or sales of securities under 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”) [5].
Accordingly, persons involved in the creation (“minting”) and redemption of Covered Stablecoins are not required to register transactions involving these stablecoins with the U.S. Securities and Exchange Commission (SEC) under the Securities Act, nor are exemptions from registration under the Securities Act applicable.
2) Key Characteristics of Covered Stablecoins
1. Covered Stablecoins are digital assets designed to serve as tools for payment settlement, funds transmission, or store-of-value purposes. These stablecoins are engineered to maintain a stable, rigid 1:1 peg to the U.S. dollar (USD), supported by holdings of USD and other low-risk, highly liquid assets to ensure the issuer can meet redemption obligations on demand. [6]
These supporting assets are denominated in USD and held in a reserve account, with a total value equal to or exceeding the redemption value of all outstanding Covered Stablecoins. Issuers may mint and redeem Covered Stablecoins with USD on a 1:1 basis without quantity limits. In other words, issuers stand ready at all times to issue one stablecoin for one USD (or proportional amount) and to redeem one stablecoin for one USD (or proportional amount), with no cap on the volume of mints or redemptions.
This fixed-price, unlimited minting and redemption mechanism enables Covered Stablecoins to maintain a stable market price closely anchored to the USD.
2. Covered Stablecoins are minted by the issuer and distributed and sold either directly by the issuer or through designated intermediaries. In certain cases, any holder may directly mint or redeem stablecoins with the issuer at the 1:1 USD-equivalent rate. In other cases, only designated intermediaries have the right to mint or redeem stablecoins directly with the issuer at the same 1:1 ratio.
In the latter scenario, holders who are not designated intermediaries cannot mint or redeem stablecoins directly with the issuer. Their only means of acquiring or disposing of stablecoins is through secondary market transactions, which may include trades with designated intermediaries.
3. The market price of Covered Stablecoins in secondary markets may deviate from their redemption price. However, the “fixed-price, unlimited minting and redemption” mechanism creates arbitrage opportunities for designated intermediaries or other qualified holders who can transact directly with the issuer, helping to keep the market price close to the redemption price.
For example, when the market price exceeds the redemption price, such participants can mint stablecoins directly from the issuer at a 1:1 ratio and sell them into the market. As supply increases, the market price typically declines toward the redemption price. Conversely, when the market price falls below the redemption price, these participants can purchase stablecoins in the secondary market and redeem them directly with the issuer. As circulating supply decreases, the price typically rises back toward the redemption price.
Market Activities Covered by This Statement [7]
Covered Stablecoins are positioned solely for commercial use—as a means of payment, a funds transmission vehicle, or a store of value—not as investment products. Market participants typically emphasize that Covered Stablecoins provide a stable, fast, reliable, and user-friendly method for payments, money transmission, and value storage. They are often described as “digital dollars.”
Market participants may also highlight the following characteristics:
1. Designed to be valued at par with or stably linked to the U.S. dollar (e.g., one Covered Stablecoin equals one USD).
2. Do not entitle holders to interest, profits, or other returns.
3. Do not represent an investment in or ownership interest in the issuer or any third party.
4. Do not grant holders any governance rights over the issuer or the stablecoin itself.
5. Holders’ economic gains or losses are not affected by the financial performance of the issuer or any third party.
As discussed below, we believe that stablecoins introduced in this manner are not being offered or sold as securities.
1) Reserve Account
The issuer of a Covered Stablecoin uses proceeds from sales to acquire specific assets, which are pooled into a dedicated “Reserve” account. The reserve consists of U.S. dollars (USD) or other assets deemed low-risk and highly liquid, ensuring the issuer can satisfy all redemption requests on demand. [8]
The reserve assets at all times support the outstanding supply of Covered Stablecoins at a ratio of at least 1:1. Reserve assets are used solely to meet redemption obligations. While the issuer may earn income (e.g., interest) from these assets, the following restrictions apply:
1. Reserve assets may be sold to fulfill redemptions but must remain segregated from the issuer’s or any third party’s other assets and must not be commingled.
2. Reserve assets may not be used for the issuer’s operations or general business purposes.
3. Reserve assets may not be loaned, pledged, or re-pledged.
4. Reserve assets must be held in a manner that prevents them from becoming subject to third-party claims.
Under these arrangements, the issuer may not use reserve assets for trading, speculation, or discretionary investment activities. Although the issuer may determine how to use income generated by the reserve (e.g., interest), such income is not distributed to holders of Covered Stablecoins.
In some instances, issuers publish “Proof of Reserves” reports as an audit or verification mechanism to demonstrate that issued stablecoins are fully backed by adequate reserve assets.
2) Legal Characterization Analysis
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define “security” by listing various financial instruments, including “stock,” “note,” and “evidence of indebtedness.” Because Covered Stablecoins exhibit certain characteristics of notes or other debt instruments, we analyze them under the test established by the U.S. Supreme Court in Reves v. Ernst & Young. [9] As discussed below, we also conduct a supplementary analysis using the “Howey Test” established in SEC v. W.J. Howey Co. [10]
Reves Case Analysis
In Reves, the U.S. Supreme Court held that because “note” is included in the statutory definition of “security” under both the Securities Act and the Exchange Act, there is a presumption that all notes are securities. [11] However, this presumption can be rebutted by demonstrating that the note is so similar—“family resemblance”—to certain types of notes typically issued in ordinary commercial transactions that it should be excluded from the definition of a security. [12] The “family resemblance test” considers four factors:
1. The motivations of the parties: Examining the reasons that would motivate a reasonable seller and buyer to enter into the transaction.
2. The plan of distribution: Whether the instrument is part of a scheme involving widespread trading for speculative or investment purposes.
3. The reasonable expectations of the investing public: Whether the average investor would reasonably expect the note to be subject to federal securities regulation.
4. Risk mitigation features: Whether the note has characteristics (e.g., regulatory oversight) that significantly reduce risk, making application of securities laws unnecessary. [13]
Federal courts apply the Reves test as a balanced, holistic inquiry, and no single factor should be determinative. [14]
1) Motivations of the Parties
If the seller’s purpose is to raise capital for business operations or major investments, and the buyer is primarily motivated by expected profit, the note is likely to be considered a security. [15] Conversely, if the transaction serves actual commercial or consumer purposes, the note is less likely to be classified as a security.
As noted earlier, purchasers of Covered Stablecoins seek them for their stability and utility as a medium of exchange or store of value in commercial transactions. Since Covered Stablecoins pay no interest and make no promise of payment beyond the 1:1 redemption right, buyers are not purchasing them with an expectation of profit. [16] Issuers use sale proceeds to fund the reserve account; although they may use income generated by the reserve to support operations, the issuance and purchase are driven by commercial rather than investment purposes. [17]
2) Plan of Distribution
In Reves, the U.S. Supreme Court stated that this factor examines whether there is “widespread trading for speculative or investment purposes.” The factor is satisfied when a financial instrument is “offered and sold to the general public,” which applies to Covered Stablecoins. [18]
However, the price-stability design of Covered Stablecoins helps ensure that secondary market trading is not speculative or investment-driven. Although temporary arbitrage opportunities may arise when market prices diverge from the redemption price, the ability of the issuer to redeem on demand and mint at will at a 1:1 ratio effectively constrains such opportunities.
3) Reasonable Expectations of the Investing Public
This factor examines how the financial instrument is marketed and sold. In Reves, the Court noted: “The advertisements for the notes described them as ‘investments,’ … and there were no countervailing factors sufficient to cause a reasonable public to question that characterization.” [19]
As previously discussed, Covered Stablecoins are not marketed as investment vehicles. Instead, they are promoted as stable, fast, reliable, and accessible tools for value transfer or storage, without emphasis on potential profits or investment returns. Therefore, from the perspective of the investing public, it would not be reasonable to expect these stablecoins to be regulated investment products under the securities laws.
4) Risk Mitigation Features
In Reves, risk mitigation features include whether a note is secured, insured, or otherwise regulated in a way that “significantly reduces the risk of the instrument, making application of the securities laws unnecessary.” [20] Covered Stablecoin issuers maintain a reserve system specifically designed to fully satisfy redemption obligations. This reserve consists of USD and/or other low-risk, highly liquid assets to ensure the issuer can meet all redemption requests at any time.
Therefore, weighing all factors, the Division concludes that under the Reves standard, asset-backed stablecoins do not constitute securities, because:
1. Sale proceeds are used to establish a reserve; buyers are not motivated by expectations of financial return;
2. The distribution of asset-backed stablecoins does not encourage speculative or investment trading;
3. Rational buyers do not reasonably expect these stablecoins to be investment instruments;
4. The ongoing maintenance of a fully funded, immediately available reserve constitutes a significant risk-mitigating feature.
In short, the issuance and sale of asset-backed stablecoins serve commercial or consumer purposes, not investment fundraising.
Howey Test Analysis
If an asset-backed stablecoin is not considered a note or another enumerated debt instrument, and is not otherwise explicitly listed in Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act, its issuance and sale must be analyzed under the “investment contract” framework—the Howey Test. This test focuses on “economic reality” and is used to assess whether arrangements or instruments outside the enumerated categories constitute securities. [22]
The Howey Test examines whether there is an investment of money in a common enterprise with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. [23] Since Howey, the Supreme Court has distinguished between investor motivation (attracted by “prospective returns on their investment” [24]) and consumer motivation (driven by “use or consumption of the item purchased”). [25] Federal securities laws apply only to investment transactions, not consumer transactions. [26]
As discussed above, buyers of asset-backed stablecoins are not attracted by expectations of profit derived from the efforts of others. These instruments are not marketed as investment products, nor are potential profits emphasized. [27] Instead, buyers seek asset-backed stablecoins as “digital dollars” for payment or value storage, analogous to using U.S. dollars.
Therefore, the Division believes that the issuance and sale of asset-backed stablecoins do not constitute investment contracts and are not securities under the federal securities laws.
For additional information, please submit an online request form to the Office of the Chief Counsel of the Division via the following URL:
https://www.sec.gov/forms/corp_fin_interpretive
References
[1] For purposes of this statement, “crypto asset” refers to an asset created, issued, and/or transferred using blockchain or similar distributed ledger technology networks—including but not limited to assets referred to as “tokens,” “digital assets,” “virtual currencies,” and “coins”—that rely on cryptographic protocols to function. Additionally, the term “issuer” includes both the issuing entity and its affiliates.
[2] This statement reflects the views of the staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “Commission”). It is not a rule, regulation, guidance, or formal position of the Commission, and the Commission has neither approved nor disapproved its content. Like all staff statements, it has no legal force or effect: it does not alter or amend existing law, nor does it impose new legal obligations on any person.
[3] Unlike reserve-backed stablecoins, algorithmic stablecoins typically rely on algorithmic mechanisms to maintain price stability, rather than being supported by real-world assets.
[4] The Division expresses its views only with respect to Covered Stablecoins as defined in this statement. It does not comment on other types of stablecoins, including but not limited to:
1. Stablecoins designed to track non-USD reference assets (e.g., non-USD fiat currencies, commodities, or other crypto assets);
2. Stablecoins that use alternative stabilization mechanisms (e.g., algorithmic mechanisms);
3. Stablecoins pegged to the USD but not redeemable for USD upon redemption;
4. Yield-bearing stablecoins—that is, stablecoins that provide holders with yield, interest, or other passive income, whether through periodic payments, reward programs, or “re-basing” mechanisms that automatically adjust the total supply of the stablecoin.
[5] The Division’s views are not conclusive and do not definitively determine whether any particular stablecoin (including asset-backed stablecoins) constitutes a security. Determining whether a stablecoin is a security requires a fact-specific analysis of its particular characteristics and the circumstances of its issuance and sale. If a stablecoin differs materially from those described herein, the Division’s conclusion may differ.
[6] Examples of such low-risk, highly liquid assets include U.S. dollar cash equivalents, demand deposits at banks or other financial institutions, U.S. Treasury securities, and money market funds registered under Section 8(a) of the Investment Company Act of 1940. Precious metals or other crypto assets are not included.
[8] Some asset-backed stablecoin issuers may be subject to state-level regulations, which may specify the types of assets permitted in reserves.
[9] Reves v. Ernst & Young, 494 U.S. 56 (1990). Federal courts applying the Reves standard use it not only for “notes” but also for other financial instruments with debt-like characteristics. See, e.g., In re Tucker Freight Lines, Inc., 789 F. Supp. 884, 885 (W.D. Mich. 1991) (holding that “the Reves approach applies to all debt instruments, including evidences of indebtedness”). Because asset-backed stablecoin issuers bear redemption obligations, stablecoins may be viewed as a form of debt. Although asset-backed stablecoins lack certain traditional features of notes (e.g., maturity dates, interest payments), the Division clarifies that even if such stablecoins are deemed notes or evidences of indebtedness, their issuance and sale would not constitute offers or sales of securities, in the Division’s view.
[10] SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Courts often apply both Reves and Howey tests where factually appropriate. For example, in Banco Espanol de Credito v. Security Pacific Nat’l Bank, 763 F. Supp. 36 (2nd Cir. 1991), the court applied both tests to evaluate loan participations.
[11] Reves, 494 U.S. at 64–66.
[12] Id. at 65. Notes excluded from the definition of “security” include:
(1) Consumer financing notes;
(2) Mortgage-backed notes;
(3) Short-term notes secured by small businesses or their assets;
(4) “Character loans” to bank customers;
(5) Short-term notes secured by assignments of accounts receivable;
(6) Notes documenting book debts arising from commercial transactions;
(7) Loan notes provided by commercial banks for routine business operations.
[13] Id. at 66–67.
[14] See, e.g., SEC v. J.T. Wallenbrock & Associates, 313 F.3d 532, 537 (9th Cir. 2002): “Failure to satisfy one factor is not dispositive; all four factors must be weighed together.”
[15] Reves, 494 U.S. at 60; Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 812 (2d Cir. 1994).
[16] In relevant contexts, we believe greater weight should be given to buyer intent. See, e.g., Pollack, 27 F.3d at 813 (holding that a note was a security where the buyer “sought to place his funds in a safe, conservative investment,” even though the seller’s intent differed).
[17] For example, asset-backed stablecoin issuers typically offer their products as stored value or prepaid products and comply with applicable state money transmission laws.
[18] Reves, 494 U.S. at 68.
[19] Id. at 68–69.
[20] Id. at 61. In Reves, the Court found no risk-mitigating features because the notes were “unsecured and uninsured,” noting that “in the absence of the Securities Act and Exchange Act, these notes would fall completely outside the scope of federal regulation” (id. at 69). See also Pollack, 27 F.3d at 814 (in analyzing the fourth Reves factor, noting that the amended complaint alleged the mortgage participation interests were “unsecured” and “not collateralized”).
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