The regulatory landscape for digital assets continues evolving as the SEC’s Division of Corporation Finance stakes out new territory. King & Spalding attorneys J.C. Boggs, Joseph Zales, Luke Roniger, Daniel Kahan and Andrew Michaelson dig into April guidance declaring that “covered stablecoins” — those maintaining one-to-one dollar value with adequate reserves — don’t constitute securities.
An April staff statement by the SEC’s Corporation Finance Division announced the division’s view that the offer and sale of covered stablecoins do not involve the offer and sale of securities under federal securities law.
Notably, the statement’s definition of covered stablecoins explicitly does not include algorithmic stablecoins
The statement is a continuation of the SEC’s efforts to “provide greater clarity on the application of the federal securities laws to crypto assets, and similar to the staff’s March 2025 statement about the application of federal securities laws to meme coins, it does not substantively diverge from prior SEC staff statements about reserve-backed stablecoins, but again underscores the commission’s seemingly crypto-friendly approach to regulating digital assets.
Corporation Finance Division statement
The statement defines “covered stablecoins” as stablecoins that (i) maintain a one-for-one value against the US dollar (and can be redeemed accordingly), and (ii) are backed by assets held in a reserve with a readily liquid USD-value that “meets or exceeds the redemption value of the stablecoins in circulation.” For stablecoins that meet this definition and share some or all the characteristics outlined below, the staff explains that the offer and sale of these assets does not involve the offer and sale of securities and therefore persons minting and redeeming those coins do not need to register those transactions with the SEC.
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Read moreDetailsCharacteristics of a covered stablecoin
According to the statement, covered stablecoins are those solely “use[d] in commerce,” which includes “making payments, transmitting money, and/or storing value” — this would not include coins used primarily for investment purposes. The staff emphasized that covered stablecoins may be likened to a “digital dollar” and highlighted certain indicia of covered stablecoins. Specifically, the staff noted that marketers of a covered stablecoin often emphasize that the coin in question:
- Is designed to have a stable value relative or corresponding to USD (g., one covered stablecoin to one USD);
- Does not entitle a covered stablecoin holder to the right to receive any interest, profit or other returns;
- Does not reflect any investment or other ownership interest in the covered stablecoin issuer or any other third party;
- Does not afford a covered stablecoin holder any governance rights with respect to the covered stablecoin issuer or the covered stablecoin; and/or
- Does not provide a covered stablecoin holder with any financial benefit or loss based on the covered stablecoin issuer or any third party’s financial performance.
Reserve requirements
The statement also identifies key characteristics of the reserve requirements for covered stablecoins. As noted, the statement provides that “[a]t all times, the assets held in the Reserve back the amount of outstanding covered stablecoins on at least a one-for-one basis.” It also provides that, “[w]hile the assets held in the Reserve may be sold to redeem covered stablecoins, they are segregated from and not comingled with the assets of the covered stablecoin issuer or any third party.” Further, the assets held in reserve (1) should not be used for operational or general business purposes; (2) should not be lent, pledged or rehypothecated; and (3) should not be designated in a manner that would subject them to third party claims.
It is important to note that the staff’s statement does not cover algorithmic stablecoins, which use algorithms instead of assets in reserve to maintain a stable value, and therefore those stablecoins would not be considered covered stablecoins.
Legal analysis
The staff analyzed the offer and sale of covered stablecoins under the tests set forth in Reves v. Ernst & Young, which applies to notes and debt instruments, and SEC v. W.J. Howey Co., which applies to the offer and sale of investment contracts.
Turning to Reves first, the statement notes that “Covered Stablecoins share some characteristics with a note or other debt instrument.” Under Reves, there is a presumption that notes and other debt instruments constitute securities and should be regulated accordingly. This presumption can be rebutted if the instrument in question passes the “family resemblance test,” which considers (1) whether the transacting parties would be motivated to enter into the transaction; (2) whether the plan for distribution includes “common trading for speculation or investment;” (3) whether the investing public would reasonably expect the note to be subject to federal securities laws; and (4) whether there is a regulatory scheme or other feature that significantly reduces the instrument’s risk. Applying that test to covered stablecoins, the staff concluded that covered stablecoins are not securities under Reves because:
- Sellers use the proceeds to fund a reserve and buyers are not motivated by an expected return on their funds;
- Covered stablecoins are distributed in a manner that does not encourage trading for speculation or investment;
- A reasonable buyer would likely expect that covered stablecoins are not investments; and
- The availability of a reserve adequately funded to fully satisfy redemptions on demand is a risk-reducing feature of covered stablecoins.
The staff next turned to Howey. Under Howey, an instrument qualifies as an investment contract subject to federal securities laws if there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The statement reasons that, since Howey, the Supreme Court “has contrasted the motivations of investors — those who are attracted to a scheme by the ‘prospects of a return on their investment’ — with the motivations of consumers — those who are ‘motivated by a desire to use or consume the item purchased.’” Using this logic, the staff concluded that covered stablecoins are not offered and sold as investment contracts because “buyers 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.” Instead, “buyers are motivated to use or consume Covered Stablecoins as so-called ‘digital dollars’ in the same way one would use USD.” Accordingly, the staff concluded that covered stablecoins should not be treated as securities under the Howey test.
Enforcement Implications
The statement, like the staff’s statement regarding application of federal securities laws to meme coin transactions, does not signal an outright lack of enforcement with respect to all stablecoins. Similar to the staff’s meme coin statement, the statement applies only to the specific and limited circumstances detailed in the staff’s statement. The staff was careful to note that “[t]he Division’s view is not dispositive of whether any stablecoin, including a Covered Stablecoin, is offered or sold as a security,” and further noted that “[w]here facts vary from those presented in th[e] Statement, the Division’s view as to whether the specific stablecoin is offered or sold as a security may be different.” Nonetheless, the staff’s application of Reves and Howey provides helpful guidance as to how a stablecoin might be treated under both of those familiar tests.
Commissioner Crenshaw disagrees with the staff (again)
In alignment with her dissent to the staff’s previous meme coin statement, Commissioner Caroline A. Crenshaw again issued a same-day competing statement categorizing the staff statement as “another installment” by the staff “dedicated to jurisdictional carve-outs for crypto.” Crenshaw’s statement criticized the statement as understating the risks of covered stablecoins. She specifically notes the “role of intermediaries, particularly unregistered trading platforms, as primary distributors of USD-stablecoins” as additional risks that the staff did not consider, noting that the prevalence of intermediaries in the distribution and redemption of covered stablecoins “significantly diminishes the value of the issuer actions staff relies on as ‘risk-reducing features.’” Additionally, she criticized the staff’s reliance on the adequacy and safety of reserves and assurances, including commentary on regulators’ warnings about the “general lack of transparency and reliability in how stablecoin reserves are invested, managed, and valued.”
Looking forward
The statement is yet another example of the SEC’s heightened interest and activity in the digital asset space. While the SEC staff foreshadowed a similar framework as early as 2019, the recent statement reveals an increasingly crypto-friendly approach. Those operating in the crypto space should anticipate more action emanating from this new SEC in the months to come, as well as from the various legislative efforts to create a regulatory framework for stablecoins.
