Stablecoins backed by cash or cash-equivalent reserves and redeemable for US dollars on a one-to-one basis are not securities under federal law, the Securities and Exchange Commission (SEC) said on April 4, offering one of its clearest positions yet on the regulatory treatment of crypto.
In a public statement, the SEC’s Division of Corporation Finance outlined its legal views on what it termed “Covered Stablecoins” — a category that includes fiat-backed digital tokens designed to maintain price stability through fully reserved dollar holdings.
According to the Division, the offer and sale of stablecoins do not involve securities transactions and, therefore, do not require registration under the Securities Act of 1933 or the Securities Exchange Act of 1934.
The move is likely to provide legal clarity for stablecoin issuers, fintech firms, and crypto payment providers that have long operated in regulatory uncertainty.
Used for payments, not profit
According to the SEC, Covered Stablecoins are designed and marketed solely as tools for payments, money transmission, and value storage.
They do not grant holders interest, profits, governance rights, or ownership claims and are typically described as “digital dollars” rather than investment products.
The SEC emphasized that these tokens are not promoted as profit-generating instruments, a key distinction under federal securities law. The regulator’s conclusion was based on two landmark legal standards: the Reves v. Ernst & Young test and the Howey test.
Under Reves, the Division found that Covered Stablecoins more closely resemble instruments used for routine commercial transactions rather than speculative notes or debt securities. The agency pointed to the buyer’s non-investment motivation and the lack of trading for profit as key reasons the tokens fall outside the securities definition.
The SEC also applied the Howey test, which examines whether an arrangement involves investing money in a common enterprise with an expectation of profit from others’ efforts. The agency found that Covered Stablecoin holders are not investing for returns and that the economic reality is that of a consumer transaction, not an investment contract.
Covered Stablecoins
According to the SEC, Covered Stablecoins must be redeemable for USD at a fixed price, at any time, and in unlimited quantities. Additionally, issuers must maintain a fully backed reserve consisting of cash or liquid, low-risk assets such as US Treasury bills.
These reserves must be segregated, not used for the issuer’s business operations, and safeguarded from third-party claims. In some cases, issuers must also publish proof-of-reserve attestations to verify solvency and transparency.
While Covered Stablecoins may trade on secondary markets, their price is typically stabilized through arbitrage. If the market price rises above the peg, designated parties can mint new tokens and sell them for a profit, increasing supply and lowering the price.
Meanwhile, if the price drops below the peg, they can buy tokens at a discount and redeem them for full value, decreasing supply and lifting the price.
Questions about yield remain
The SEC highlighted that holders of Covered Stablecoins do not receive any form of yield or share in the earnings generated from reserve assets. While issuers may earn interest on the assets held in reserve, those earnings are retained by the issuer and not distributed to token holders.
The Commission emphasized that the absence of yield or financial benefit removes a key element of the Howey test, namely, the expectation of profit derived from the efforts of others.
By clarifying that Covered Stablecoins are not marketed as investments and offer no upside participation, the SEC drew a line between fiat-backed tokens used for utility and those marketed with return-generating features.
The agency noted that tokens promising returns, profit-sharing, or exposure to an issuer’s financial performance could still be subject to securities laws.
The statement does not extend to algorithmic or uncollateralized stablecoins, which remain subject to further legal and policy consideration. Nonetheless, the announcement marks a key milestone in delineating the regulatory boundaries of digital dollar equivalents.
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