The Division of Corporation Finance at the US Securities and Exchange Commission (SEC) recently issued guidance regarding the application of federal securities laws to certain stablecoins.

While this guidance, released on April 4, 2025, expresses only the views of the staff of the Division of Corporation Finance and is not legally binding, it nevertheless clearly states the SEC staff’s current position on what the guidance defines as “Covered Stablecoins.”

Breakdown of the guidance

The guidance describes stablecoins generally as crypto assets designed to maintain a stable value relative to a reference asset, such as the US Dollar (USD), a commodity such as gold, or a pool or basket of assets.

However, the guidance is limited to stablecoins (Covered Stablecoins) that are intended to: maintain a stable value relative to the USD on a one-for-one basis; be redeemed for USD on a one-for-one basis; and be backed by assets held in a reserve that are considered “low risk and readily liquid” and have a USD-value that meets or exceeds the redemption value of the stablecoins in circulation.

The guidance discusses the characteristics of Covered Stablecoins, noting that they are “designed and marketed for use as a means of making payments, transmitting money, or storing value.” A holder may be eligible to mint or redeem a Covered Stablecoin directly with the issuer. Alternatively, a holder may be required to purchase and sell the Covered Stablecoin through a secondary market transaction with a designated intermediary to obtain liquidity.

The guidance takes the view that the offer and sale of Covered Stablecoins do not involve the offer and sale of securities under Section 2(a)(1) of the Securities Act of 1933, as amended (the Securities Act) or Section 3(a)(10) of the Securities Exchange Act of 1934, as amended (the Exchange Act).

As a result, the minting, offer, sale, and redemption of Covered Stablecoins are not required to be registered under the Securities Act. Notably, the guidance does not apply to the minting, offer, or sale of any other types of stablecoins, such as yield-bearing stablecoins, stablecoins that are intended to track a reference asset other than USD, stablecoins that are redeemable for assets other than USD, or algorithmic stablecoins.

The guidance also notes that Covered Stablecoins are marketed for use in commerce and not for investment purposes. The guidance enumerates several features of Covered Stablecoins, which stablecoin marketers can follow to bolster their claims that Covered Stablecoins are not offered or sold as securities, including:

• Stable value relative or corresponding to (ie, pegged to) the USD
  
• No entitlement to interest, profit, or other returns
  
• No investment or other ownership interest in the Covered Stablecoin issuer or any other third party
  
• No governance rights with respect to the Covered Stablecoin issuer or the Covered Stablecoin, and/or
  
• No financial benefit or loss based on the Covered Stablecoin issuer or any third party’s financial performance.

The guidance also highlights the use of proceeds from the sale of Covered Stablecoins to acquire assets held in a pooled account, defined as a “Reserve.” The intended purpose of the Reserve is to allow issuers to honor redemptions of stablecoins on demand.

The Reserve assets may be invested in USD and/or other assets that are considered “low-risk and readily liquid.” The assets held in the Reserve are restricted to paying redemptions, although the issuer may realize earnings on the assets held in the Reserve. The assets held in the Reserve are segregated from and not commingled with the assets of the Covered Stablecoin issuer or any third party. The guidance also notes that the Reserve assets are:

• Not used by the Covered Stablecoin issuer for operational or general business purposes
• Not otherwise lent, pledged, or rehypothecated for any reason
• Held in a manner designed not to subject them to claims of third parties, and
• Not used to engage in trading, speculation, or discretionary investment strategies.

The guidance’s legal analysis

In concluding that Covered Stablecoins are not offers and sales of securities under the Securities Act and the Exchange Act, the guidance applies the tests set forth in the US Supreme Court cases Reves v. Ernst & Young and SEC v. W.J. Howey Co. In these cases, the Supreme Court set forth certain factors to determine whether the offer and sale of certain instruments or arrangements qualify as the offer and sale of securities.

Reves analysis

In Reves, the court established a “family resemblance test,” which includes four factors for determining whether certain notes or other debt-like instruments are properly exempted from the definition of “security.” The guidance compares Covered Stablecoins to notes and after applying the four factors under Reves, concludes:

1. Motivation of the seller and buyer: A buyer’s motivation to purchase and own Covered Stablecoins is not driven by the instrument’s ability to return a profit, but rather its utility in commercial transactions, or as a store of value given that these Covered Stablecoins do not pay or guarantee to pay interest or otherwise convey any rights to payments or assets (except upon redemption for USD on a one-for-one basis)

2. Plan of distribution of the instrument: The Covered Stablecoin’s price stability design helps ensure that any secondary market trading is not for speculation or investment and arbitrage opportunities are minimized, because Covered Stablecoin issuers will honor redemptions on demand on a one-for-one basis with the USD

3. Reasonable expectations of the investing public: Covered Stablecoins are not marketed as investments, but as a stable, quick, reliable, and accessible means of transferring or storing value

4. Risk-reducing features: Covered Stablecoin issuers maintain a Reserve designed to fully satisfy their redemption obligations, which consists of USD and/or other assets that are considered “low-risk and readily liquid” so as to allow Covered Stablecoin issuers to honor all redemptions on demand

Accordingly, the guidance states Covered Stablecoins are not securities under Reves.

Howey analysis

The guidance also applies the “investment contract” test under Howey, which determines if a financial instrument is a security by assessing “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 guidance concludes that Covered Stablecoins are not securities because purchasers of Covered Stablecoins do not purchase them with a reasonable expectation of profits derived from the entrepreneurial or managerial expertise of others, but rather they purchase them to use or consume them as “digital dollars.”

Practical implications

Issuers and purchasers of stablecoins that meet the definition of “Covered Stablecoins” may rely on the guidance when minting, offering, selling, or redeeming their stablecoins in determining whether registration under the Securities Act is required or whether a Covered Stablecoin represents a security under the Exchange Act. The guidance offers a pathway for USD-backed stablecoins to operate outside the securities registration framework.

Notably, the SEC has demonstrated a willingness to engage with the digital asset industry to foster innovation. On February 18, 2025, the SEC declared effective the first yield-bearing stablecoin registration statement, permitting Figure Markets to register its YLDS stablecoin. This reflects the SEC’s openness to finding pathways to make a public interest determination in connection with registration of digital assets products that fall outside of the Covered Stablecoin framework, and signals that the SEC is open to consider novel stablecoin structures.

However, the guidance is limited in scope and does not apply to stablecoins that are not Covered Stablecoins, such as yield-bearing stablecoins, algorithmic stablecoins, bank-issued stablecoins, multi-currency stablecoins, and commodity-backed stablecoins.

The guidance further leaves unaddressed protocols or platforms that make use of Covered Stablecoins to generate returns, such as certain stablecoins integrated in decentralized finance (DeFi) protocols. It also remains unclear what the SEC’s views are with respect to the minting or redemption of other digital assets backed by real-world assets (RWAs) and whether they represent securities requiring registration under the Securities Act.

Businesses are encouraged to evaluate the offer and sale of these types of products under the Howey and Reves tests, or other relevant case law, as necessary. Issuers and market intermediaries of these instruments should also consider consulting with counsel regarding compliance with US federal securities laws.

While the definition of “Covered Stablecoins” is limited to those that can be redeemed for USD on a one-for-one basis, there still may be operational and legal issues with redeeming certain Covered Stablecoins. As SEC Commissioner Caroline Crenshaw highlighted in her dissenting statement, the prevalent reliance on intermediaries for redemption – accounting for over 90 percent of USD-stablecoins in circulation – may raise some concerns. This intermediary structure may not allow the holder of the stablecoin a direct privity of contract with the issuer and may pose a lack of recourse against the issuer if the intermediary is unable or unwilling to redeem the stablecoin. In addition, Commissioner Crenshaw highlights that the Covered Stablecoins may not be collateralized by the reserve assets, nor is there visibility into whether there is insurance for the benefit of the holders should the issuer not redeem.

Additionally, while the offer and sale of Covered Stablecoins does not involve the offer and sale of securities, it is important for issuers of stablecoins to be aware of additional regulatory obligations. Issuing and redeeming stablecoins remain regulated activities under the Bank Secrecy Act (BSA), as enforced by the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) regulations related to money services businesses (MSBs) involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies. Covered Stablecoin issuers who intend to issue, sell, or custody stablecoins may also still need to comply with state money transmission laws, including with respect to licensure and transaction reporting, among other requirements.

Finally, Congress is poised to enact comprehensive stablecoin legislation designed to establish a legal framework for stablecoins used as a means of payment. The legislation is intended to set out statutory requirements for federal (or state) licensing and oversight, transparency and one-for-one reserve standards, redemption and consumer protection requirements, and anti-money laundering (AML)/know-your-customer (KYC) compliance.

Conclusion

The SEC’s guidance on Covered Stablecoins represents a meaningful step toward regulatory clarity. By outlining a defined framework for USD-pegged, fully reserved, non-yielding stablecoins used for payments, the guidance is expected to evoke more discourse as Congress considers more comprehensive stablecoin legislation.

This article was originally posted to dlapiper.com on April 7, 2025.