Stablecoins Under Siege: The SEC’s New Rules Aren’t What They Seem

The SEC just made its Statement on Stablecoins, finally clarifying that “Covered Stablecoins” are not considered securities. 

But while that sounds like great news for a crypto community that has been begging for regulatory clarity, there’s a MASSIVE catch that a lot of people are missing.

The worst case scenario? This could be a hidden play to gain further control over the crypto ecosystem.

This article is part of the Chain Reactions series: expert opinions on everything blockchain and crypto.

What are “Covered” Stablecoins?

Covered Stablecoins, as outlined by the Division of Corporation Finance, have five key properties which differentiate them from other stablecoins. 

1. Stable Value Relative to USD: Covered Stablecoins are designed to maintain price stability around $1 USD.
   
2. Redeemability: They can be redeemed for USD on a one-for-one basis, ensuring that holders can exchange the stablecoin for an equivalent amount of USD at any time.
   
3. Asset-Backed Reserve: These stablecoins are backed by assets held in a reserve. The reserve consists of low-risk and readily liquid assets with a USD value that meets or exceeds the redemption value of the stablecoins in circulation. This ensures that the issuer can honor all redemption requests.
   
4. Marketing: They are marketed and designed for use as a means of making payments, transmitting money, or storing value — rather than as investment vehicles.
   
5. No Interest or Ownership: Holders of Covered Stablecoins do not have rights to receive interest, profits, or other returns. They also do not have any ownership interest in the issuer or governance rights.

Which Stablecoins Qualify as Covered Stablecoins?

The SEC’s designation of a Covered Stablecoin doesn’t treat all stablecoins as equal. The new statement is especially favorable to some major names, and incredibly harsh to others.

Is USDC a Covered Stablecoin?

Circle’s USDC, for example, benefits massively from this designation.

The $60.8 billion USDC in circulation is backed by $60.9 billion in cash-like holdings (specifically, 55.3% in U.S. Treasury Repurchase Agreements and 44.7% in U.S. Treasury Debt). This makes USDC a slightly-overcollateralized stablecoin.

In addition, the USDC stablecoin has unlimited redeemability, is marketed for use in commerce only, and offers no interest or ownership to USDC holders.

These properties likely give USDC a “Covered Stablecoin” status — but are they the only winners here?

Is USDT a Covered Stablecoin?

Tether’s USDT, on the other hand, may not receive the same designation per this new SEC statement.

Tether holds $143 billion USD worth of reserve assets, compared to $136 billion USD in liabilities. 

Despite this overcollateralization, only 82% consists of cash or cash equivalents, with approximately 3.7% from precious metals and 5.47% from Bitcoin.

Even though USDT fulfills the majority of the regulatory requirements to qualify as a Covered Stablecoin, the nature of USDT’s backing could now leave the door open for the US SEC to classify it as a security. 

What Stablecoins Are Not "Covered Stablecoins"?

The SEC has made it clear that stablecoins which hold these properties are not considered Covered Stablecoins:

1. Backed by crypto, precious metals, or assets other than cash and cash equivalents.
2. Marketed as an investment or a yield-bearing asset.
3. Coins that give holders ownership over the operations of the issuer.

That’s where this statement leaves a lot of stablecoins out in the cold.

For instance, despite being the third-largest stablecoin by market cap, DAI of MakerDao may not be considered a Covered Stablecoin.

Is DAI a Covered Stablecoin?

The DAI Stablecoin is a crypto-backed stablecoin. It’s issued when users collateralize cryptocurrency on-chain and mint Dai as a loan.

The primary collateral for DAI is USDC, but users also use Ethereum, Real-World-Assets (RWAs) on Ethereum, and other forms of crypto. 

The SEC's statement requires all stablecoins to be backed by cash or cash-equivalents. This raises the question: is USDC considered a cash or cash-equivalent, since it’s backed by such assets?

Also, in what proportions is a stablecoin allowed to be backed by a cryptocurrency such as Ethereum and still be considered a “Covered Stablecoin”?

Finally, the MakerDAO protocol has a function called the DAI Savings Rate (DSR). It allows holders of DAI to earn yield by locking up their stablecoin. 

But does the presence of this function violate the requirement that the stablecoin only be advertised as a tool for commerce and not as an investment?

What Does This Really Mean for Crypto?

The SEC’s statement reflects a goal previously stated by the Trump administration. 

Specifically, the aim to promote and protect “the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”.

With this recent statement, the criteria to become a “Covered Stablecoin” — for now, at least — implies that the issuer must hold actual US dollars or USD-equivalents on their balance sheets. 

This incentivizes large players like USDT and future stablecoin issuers to buy USD instead of backing their stablecoins with assets like crypto or precious metals. 

As a consequence, the criteria completely invalidates decentralized stablecoin issuance protocols — including some of the biggest stablecoins in the world, which are backed by cryptocurrencies. 

That’s a far cry from why crypto was invented. Cryptocurrencies are supposed to be an alternative to fiat currencies with better financial technology, not merely an extension of them. 

Unless something changes with this statement, it seems the SEC is seeking to make it difficult for projects that back their stablecoins with anything other than the mighty US dollar.