- Tether likely doesn’t qualify as a “covered” stablecoin under the SEC’s criteria due to its reserve composition.
- The new SEC leadership is taking multiple steps to provide greater clarity for the digital assets sector.
Last week, the U.S. Securities and Exchange Commission (SEC) released a statement on stablecoins clarifying that certain “covered” stablecoins, primarily those backed by fiat currency that don’t offer yield to holders, will not be considered securities. For stablecoins falling outside this classification, the SEC has not expressed a definitive position.
The SEC’s guidance appears to exclude Tether from the “covered” category since approximately 9% of Tether’s reserves consist of metals and crypto assets. The SEC specifically requires USD stablecoin reserves to be held in “low-risk and readily liquid” assets, explicitly excluding “precious metals or other crypto assets.” An additional 8% of Tether’s reserves would also likely fail to meet the SEC’s liquidity and risk requirements.
While some may question the timing of this guidance with pending stablecoin legislation, it serves immediate regulatory purposes. The clarification helps reduce legal uncertainty for Circle’s IPO plans and potentially sidesteps questions about the Trump family-controlled World Liberty Financial’s USD1 stablecoin.
Legal Framework for Stablecoin Classification
The SEC based its determination on the 1990 Reves v. Ernst & Young case, which established the Reves Test for identifying securities. This framework evaluates whether an issuance aims to raise capital for the issuer or serve a commercial purpose. Since stablecoin issuers typically don’t utilize the reserves for funding, they pass this criterion. The SEC also notes that secondary market activity for stablecoins aims at value stabilization rather than speculation.
However, Commissioner Caroline Crenshaw, the lone Democrat Commissioner, published a dissenting opinion. She emphasized that retail holders cannot directly redeem stablecoins, making intermediaries the critical actors. Crenshaw noted that reserves represent only assets, while issuers might carry additional liabilities beyond stablecoin issuance, concluding that stablecoins are “uncollateralized, uninsured, and laden with risk.”
Broader Changes in Digital Asset Regulation
The stablecoin statement represents one component of the new SEC leadership’s efforts to provide regulatory clarity for digital assets. Acting Chair Mark Uyeda recently outlined on X several areas the commission plans to revisit, including guidance on cryptocurrencies as investment contracts and qualified custodians.
The SEC has already rescinded SAB 121 (which prevented banks from offering digital asset custody), provided guidance on meme coins and crypto mining, established a crypto taskforce, conducted crypto roundtables, and withdrawn from several legal cases. These actions signal a shift in the regulatory approach to digital assets under the commission’s new leadership.
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