On Friday, the Securities and Exchange Commission's (SEC) Division of Corporation Finance issued guidance clarifying when certain stablecoins may not constitute securities under the federal securities laws.[1] This development comes as Congress is actively considering legislation — notably the GENIUS Act and the STABLE Act — that would explicitly carve out payment stablecoins from securities definitions and establish a comprehensive federal regulatory framework for payment stablecoins. The timing suggests the SEC is attempting to provide interim clarity while legislative solutions remain pending.

Overview of the Division’s Guidance

The guidance provides detailed analysis of whether “Covered Stablecoins” constitute securities under the federal securities laws. The Division defined Covered Stablecoins as digital assets designed to maintain stable value relative to the US Dollar (USD) on a one-for-one basis, redeemable for USD on demand, and backed by assets held in a reserve with value meeting or exceeding the redemption value of stablecoins in circulation. These reserves must consist of low-risk, readily liquid assets to enable issuers to honor redemptions.

The Division’s analysis applied two distinct securities law tests. First, under the Reves “family resemblance” test for note-like instruments, the Division examines four factors: (1) buyer and seller motivations; (2) plan of distribution; (3) reasonable expectations of the investing public; and (4) risk-reducing features.[2] The Division concluded that Covered Stablecoins are issued and purchased for commercial rather than investment purposes, with buyers motivated by stability and utility in commercial transactions rather than profit potential. According to the Division, the price stability mechanisms of Covered Stablecoins minimize speculative trading, and marketing materials typically emphasize payment functionality rather than investment returns.

Importantly, the Division viewed adequately funded reserves as a significant risk-reducing feature under the fourth Reves factor, which examines whether there are features that reduce risk such that the application of securities laws becomes unnecessary. In the Reves decision, the Supreme Court noted that instruments that are “collateralized” may possess sufficient risk-reducing features to avoid classification as securities, and the Division draws a parallel between such traditional collateralization and stablecoin reserves.[3]

Second, the Division applied the Howey test for investment contracts, examining whether there is an investment of money in a common enterprise with reasonable expectation of profits derived from entrepreneurial efforts of others. The Division determined that buyers lack reasonable profit expectations since Covered Stablecoins are generally marketed for use in commerce rather than as investments, offering price stability instead of appreciation potential.

Commissioner Caroline Crenshaw issued a dissenting statement challenging the Division’s analysis. She emphasized that approximately 90 percent of USD stablecoins circulate through intermediaries rather than direct issuer-to-retail distribution channels, and as a result, retail holders generally have no direct redemption rights against issuers and no claims to the reserve assets.

For its part, the Commodity Futures Trading Commission (CFTC) has long maintained that stablecoins are commodities and, therefore, are subject to the CFTC’s anti-fraud and anti-manipulation enforcement jurisdiction. For example, in October 2021, the CFTC brought and settled an enforcement action with Tether Holdings Limited for making untrue or misleading statements of material fact when it claimed that the US dollar tether token (USDt) was fully backed by US dollars held in reserve.[4]

Regulatory and Market Implications

The guidance may serve as an interim regulatory clarification until comprehensive legislation passes, potentially offering some clarity for issuers of Covered Stablecoins. However, its effectiveness may be limited since proposed legislation, if adopted, would likely supersede it with explicit statutory carve-outs. Furthermore, both the GENIUS Act and STABLE Act would explicitly assign enforcement authority over payment stablecoins to federal and state banking regulators rather than the SEC, potentially creating a different regulatory framework than what might be inferred from the Division’s guidance.

[1]See Katten’s Quick Reads post on the Division’s recent similar guidance on proof-of-work mining activities and memecoins here.

[2]Reves v. Ernst & Young, 494 U.S. 56 (1990).

[3]Id. at 69.

[4]See also In the Matter of Opyn, Inc., 2023 WL 593238, at *3 (“Ether and stablecoins such as USDC are encompassed in the definition of ‘commodity’ in Section 1a(9) of the [Commodity Exchange Act], and are subject to the applicable provisions of the Act and Regulations.”).