On April 4, 2025, the U.S. Securities and Exchange Commission took a step towards clarifying its position on the regulatory status of reserve-backed stablecoins. In a recent statement, the SEC’s Division of Corporation Finance determined that certain types of stablecoins, specifically those designed to maintain a stable value relative to the U.S. dollar and backed by low-risk, liquid assets, do not constitute securities. The Division reasoned that these “covered stablecoins” are intended to offer stability and reliability, making them distinct from other digital assets that may be subject to securities laws. In arriving at this determination, the Division applied two primary tests based on prior case law: the Reves “family resemblance” test and the Howey Test.
The Reves “family resemblance” test examines four factors to determine whether an instrument resembles a security. The Division concluded that under this test, covered stablecoins do not resemble securities, noting that (1) covered stablecoins are issued and purchased for commercial purposes rather than investment, with buyers motivated by stability and utility in transactions rather than profit potential; (2) covered stablecoins are distributed in a manner that emphasizes payment functionality rather than investment returns; (3) the public generally views these stablecoins as a means of payment rather than an investment; and (4) adequately funded reserves significantly reduce risks, drawing parallels to traditional collateralization.
The Howey Test examines whether an instrument is a security if it otherwise involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The Division found that covered stablecoins do not meet these criteria as they are primarily used for payment rather than profit.
However, SEC Commissioner Caroline A. Crenshaw issued a dissenting statement, expressing concerns about the analysis employed. Commissioner Crenshaw argued that the statement’s legal and factual errors paint a distorted picture of the USD-stablecoin market and drastically understate its risks. She highlighted the role of intermediaries in stablecoin distribution and redemption, which she argued pose additional risks the Division did not fully consider.
The Division noted that this statement, like all staff statements, has no legal force or effect; however, the statement may have an impact on the stablecoin industry. Stakeholders are encouraged to stay informed and engaged as the regulatory landscape progresses.