The SEC staff has promulgated new views on stablecoins. Specifically, the staff statement addresses stablecoins that are designed to maintain a stable value relative to the United States Dollar, or “USD,” on a one-for-one basis, can be redeemed for USD on a one-for-one basis (i.e., one stablecoin to one USD), and are backed by assets held in a reserve that are considered low-risk and readily liquid with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation. The SEC staff statement refers to the types of stablecoins addressed by this statement as “Covered Stablecoins.”
The staff notes that Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “evidence of indebtedness.” Because Covered Stablecoins share some characteristics with a note or other debt instrument, the staff believes is it appropriate to analyze them under the test set forth in Reves v. Ernst & Young.
Under Reves, while a note is presumed to be a security, that may be rebutted by showing that the note strongly resembles one of the several types of notes issued in connection with typical commercial transactions and, accordingly, are properly excepted from the definition of security. After reviewing relevant factors, the staff concluded on balance, 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.
According to the staff the offer and sale of Covered Stablecoins is to advance a commercial or consumer purpose.
The Staff also conducted further analysis of the offer and sale of Covered Stablecoins under the “investment contract” test set forth in Howey. The “Howey test” is used to analyze arrangements or instruments not listed in Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act based on their “economic realities.”
According to the staff in evaluating the economic realities of a transaction, the test is whether 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 staff notes 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.” The staff asserts that while the federal securities laws apply to transactions in investments, they do not apply to consumer transactions.
The staff concludes that 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. Rather, buyers are motivated to use or consume Covered Stablecoins as so-called “digital dollars” in the same way one would use USD. Accordingly, it is the staff’s view that Covered Stablecoins are not offered or sold as investment contracts.
