Original title:Statement on Stablecoins》

author：U.S. Securities and Exchange Commission Corporate Finance Department

Compilation：Aki Chen Wu said blockchain

To further clarify the scope of application of the US Federal Securities Law in the field of crypto assets [1], the Division of Corporation Finance has put forward relevant opinions on specific types of crypto assets (usually known as "stable coins") [2]. This statement is for stablecoins that meet the following types:

1. The design mechanism ensures anchoring to the USD at a 1:1 ratio,
2. Support redemption of USD at a ratio of 1:1 (i.e. 1 stablecoin can be converted to 1 USD),
3. Endorsed by low-risk and highly liquid reserve assets, its US dollar valuation always covers the redemption demand of stablecoins in circulation.

As explained later, we refer to the type of stablecoins covered by this statement as “compliant stablecoins”.

Stablecoin Overview

A stablecoin is a type of crypto asset designed to keep its value stable relative to a reference asset (such as US dollar or other fiat currency, commodities such as gold, or a package of assets). Typically, stablecoins track the value of reference assets at a ratio of 1:1. Stablecoins may use different ways to maintain their value stability: in some cases, stablecoins are endorsed by reserve assets, and the assets held in the reserve are used to ensure 1:1 exchange of stablecoins with reference assets; in other cases, stablecoins maintain stability through mechanisms other than reserves, such as relying on algorithms to adjust the supply of stablecoins according to changes in market demand [3].

Given the differences in stability mechanisms and reserve assets (if applicable), there are also significant differences in the risks faced by stablecoins. Stablecoin issuers usually offer and sell stablecoins at a price equivalent to the reference asset (1:1). For example, when the reference asset is USD, the issuer will sell 1 stablecoin at a price of USD 1; if a small share is supported, it will still correspond to a 1:1 value (such as 0.5 stablecoins for USD 0.50). When a user redeems, the issuer usually uses the reserve assets to exchange the stablecoins back to the reference assets at a ratio of 1:1.

1) The position of the Ministry of Finance on compliant stablecoins[4]

According to the operating model and applicable conditions described in this statement, the Ministry of Finance believes that the issuance and sale of compliant stablecoins does not constitute securities issuance and sale as defined in Section 2(a)(1) of the Securities Act 1933 or Section 3(a)(10 of the Exchange Act 1934 [5].

Therefore, in the process of participating in the "minting" (i.e. creation) and redemption of compliant stablecoins, relevant entities do not need to perform relevant transaction registration procedures with the Securities and Exchange Commission (SEC) in accordance with the Securities Act, nor do they need to apply the exemption clauses on registration under the Securities Act.

2) The core characteristics of compliant stablecoins

1. Covered Stablecoins are a type of crypto assets designed to serve as payment settlement, fund transfer tools or to meet stored value needs. Such stablecoins are designed to maintain a stable 1:1 rigid anchor relationship with the US dollar (USD), ensuring that the issuer can fulfill his redemption obligations as needed by holding full US dollars and other reserve assets that are considered low-risk and highly liquid. [6]

These supporting assets are deposited in reserve accounts in USD, with a total value equal to or exceeding the redemption value of the compliant stablecoin in circulation. The issuing party of compliant stablecoins can mint and redeemed with US dollars in a 1:1 ratio, and is not subject to quantity restrictions. In other words, the issuer is always ready to mint a stablecoin for USD 1 (or corresponding ratio) and redeem a stablecoin for USD 1 (or corresponding ratio). There is no upper limit on the amount of minting and redemption.

Through this fixed price, unlimited minting and redemption mechanism, the market price of compliant stablecoins can maintain a stable anchor relationship with the US dollar.

1. Complied Stablecoins are minted by the issuer and are issued and sold by the issuer or its designated intermediary. In some cases, any holder can directly mint and redemption of stablecoins with the issuer at a ratio of 1:1 to the US dollar. In other cases, only designated intermediaries are eligible to directly mint and redemption of stablecoins with the issuer in the same 1:1 ratio.

In the latter case, holders of non-designated intermediaries are unable to mint or redeem stablecoins directly to the issuer, and the only way for them to acquire or dispose of stablecoins is through secondary market transactions, which may include transactions with designated intermediaries.

1. The transaction price of Covered Stablecoins in the secondary market may deviate from its redemption price. However, its “fixed price, unlimited casting and redemption” mechanism provides arbitrage opportunities for designated intermediaries or other qualified holders who can directly conduct casting and redemption with the issuer, thereby helping to maintain market prices close to the redemption price.

For example, when the market price is higher than the redemption price, such entities can directly mint stablecoins from the issuer in a 1:1 ratio and place them on the market. As supply increases, market prices usually fall, thus approaching redemption prices. On the contrary, when the market price is lower than the redemption price, these entities will purchase stablecoins in the secondary market and redeem them directly from the issuer. As the amount of circulation decreases in the market, the price usually rises, thus approaching the redemption price again.

Compliant stablecoin market activities covered by this statement [7]

The market positioning of Covered Stablecoins is for commercial purposes only, that is, as a means of payment, a fund transfer tool or a value storage tool, not as an investment product. Market-related personnel usually emphasize compliant stable currency and currency for stable, fast, reliable and easy-to-use payments, currency transmission and value storage means. In addition, such stablecoins are often compared to "digital dollar".

Market participants may also usually indicate that compliant stablecoins have the following characteristics:

1. Designed to be equivalent to USD (USD) or stable peg (for example: a compliant stablecoin corresponds to one dollar).
   
2. Do not grant the holder any right to interest, profit or other income.
   
3. It does not represent investment or other ownership interest in the issuer or any third party.
   
4. The holder does not grant any governance rights to the issuer or the stablecoin itself.
   
5. The holder's financial interests or losses are not affected by the financial performance of the issuer or any third party.

As described below, we believe that stablecoins launched by the following methods indicate that compliant stablecoins are not issued or sold as securities.

1) Reserve account

The issuer of Covered Stablecoins will use the proceeds of its sales to purchase specific assets, which are centrally kept in an asset pool called a "Reserve". The reserve holds assets including USD (USD) or other assets deemed as low-risk, highly liquid to ensure that the issuer can fulfill all redemption requests as needed. [8]

Reserve assets support the number of compliant stablecoins in circulation at a ratio of no less than 1:1 at any time. Reserved assets are only used to pay redemption requests, although the issuer can obtain income (such as interest) from it, however:

1. Reserved assets may be sold during the redemption process, but shall always be isolated and managed in isolation from other assets of the issuer or any third party and shall not be confused.
   
2. Reserved assets shall not be used for the operational or general business purposes of the issuer.
   
3. Reserved assets shall not be lent, pledged or re-pled.
   
4. The way reserve assets are held should ensure that they do not become the subject of a third-party claim.

Based on the above arrangements, the issuer shall not use reserve assets for investment operations driven by trading, speculative or subjective judgment. Although the issuer may decide at its sole discretion how the gains arising from reserve assets (such as interest), such gains will not be distributed to holders of compliant stablecoins.

In some cases, the issuer will issue a "Proof of Reserves" as an audit or verification tool to prove that the stablecoins it is issued are supported by sufficient reserve assets.

2) Legal Qualitative Analysis

Article 2(a)(1) of the Securities Law and Article 3(a)(10) of the Exchange Law define the meaning of "security" by listing a variety of financial instruments, including "stock", "notes" and "evidence of indebtedness". Because Complied Stablecoins are characterized by notes or other debt instruments in some respects, we analyze them based on the judgment criteria established by the U.S. Supreme Court in the Reves v. Ernst & Young. [9] As described below, we will also refer to the "Howey Test" established in the SEC v. W.J. Howey Company case for additional analysis. [10]

Reves Case Study

In the Reves case, the U.S. Supreme Court held that since "notes" are one of the instruments listed in the Securities Act and the Exchange Act for the definition of "securities", in principle, all notes should be presumed to constitute securities. [11] However, this presumption can be overturned by demonstrating that the notes have a high similarity to several notes issued in typical commercial transactions, thereby appropriately excluding the definition of "securities". [12] This so-called "family similarity test" includes the following four factors:

1. Analysis of the true intentions of the transaction related parties: Examine the motivations that prompt rational sellers to trade with buyers.
   
2. The circulation method of securities: Check whether the financial instrument is an instrument used for "universal transactions conducted by speculation or investment."
   
3. Reasonable expectations of the investing public: Check whether ordinary investors will reasonably expect that the notes are securities adjusted by the federal securities laws.
   
4. Risk mitigation characteristics: Examine whether the notes have certain characteristics (for example, subject to other regulatory mechanisms), thereby significantly reducing the risk of the notes and reducing the necessity of applying the Securities Law and the Exchange Law. [13]

Federal courts adopt a comprehensive balanced test method when applying the Reves test, and all factors should not be considered separately to determine whether the notes constitute securities or non-securities. [14]

1) The true intention of the transaction related party

If the seller's purpose is to raise funds for the overall operation of its business or major investment, and the buyer is primarily concerned with the profits expected to arise from the Note, the Note is likely to be considered a securities. [15] On the contrary, if the purpose of the bill exchange is to serve actual business scenarios or consumer uses, the bill is unlikely to be considered a securities.

As mentioned above, buyers who purchase compliant stablecoins are due to their stability and the need to be used as a means of payment or a store of value in commercial transactions. Since the compliant stablecoin neither pays nor promises to pay interest, nor grants holders other payments or asset interests other than USD divided by a 1:1 ratio, the buyer does not purchase and hold the stablecoin out of profit expectations. [16] The issuer of a compliant stablecoin uses the proceeds of sales to enrich the reserve account. Although the proceeds generated by the reserves may be used to support their business operations, their issuance and purchases are mainly for commercial purposes rather than investment purposes. [17]

2) The circulation method of securities

In Reves, the U.S. Supreme Court noted that this factor is to examine whether there are “universal transactions for speculative or investment purposes.” This factor is met when financial instruments are “issued and sold to the general public”, and compliant stablecoins meet this requirement. [18]

However, the price stability design of compliant stablecoins helps ensure that their transactions in the secondary market are not for speculative or investment purposes. Although arbitrage opportunities may occur in the secondary market when their market price deviates from the redemption price, such arbitrage opportunities will be effectively limited because the issuer can redeem on demand and mint and redeemed with the US dollar at any time in a 1:1 ratio.

3) Reasonable expectations of the investing public

This factor aims to examine the marketing and sales methods of relevant financial instruments. In Reves, the court made it clear that “the advertisement of the notes in this case describes them as “investment’”, … and there is no reverse factor sufficient to make the rational public question the statement.”[19]

As mentioned earlier, Covered Stablecoins are not advertised in the form of investment tools. Instead, it is promoted as a stable, fast, reliable and easy to obtain method of transferring or storing value, rather than emphasizing potential profits or return on investment. Therefore, from the perspective of the investment public, it is not reasonable to expect that such stablecoins are investment tools regulated by the Securities Law.

4) Risk mitigation characteristics

In the Reves case, the risk mitigation characteristics of this factor focus on include whether the notes are supported by mortgages, whether they are covered by insurance, or whether they are subject to other regulatory mechanisms, thus “significantly reducing the risk of the financial instrument and making the applicable securities laws no longer necessary”. [20] The issuer of the asset-guaranteed stablecoin maintains a reserve mechanism designed to fully fulfill its redemption obligations, [21] The reserve consists of US dollars and/or other assets deemed to be low-risk, high-liquidity, to ensure that the issuer can fulfill all redemption requests at any time.

Therefore, based on the judgment of various factors, this department believes that according to the Reves case standards, asset-guaranteed stablecoins do not constitute securities, and the reasons are as follows:

1. The issuer uses the proceeds of the sale to establish a reserve account, and the buyer’s motivation for purchasing does not stem from expectations of returns on funds;
   
2. The distribution of asset-guaranteed stablecoins does not encourage speculation or investment transactions;
   
3. A rational buyer will not reasonably expect that such stablecoins are investment tools;
   
4. Continuous provision of sufficient reserves that can be used to meet redemption obligations at any time constitutes a substantial risk mitigation mechanism.

In short, the issuance and sale of asset-guaranteed stablecoins is for commercial or consumer purposes, rather than for raising investments.

Howey Analysis

If the asset-guaranteed stablecoins are not considered as notes or other debt instruments and do not belong to other financial instruments explicitly listed in Article 2(a)(1) of the Securities Act and Article 3(a)(10) of the Exchange Act, further analysis of their issuance and sales behaviors must be conducted based on the "Investment Contract" standard, namely Howey Test. The test is centered on "economic substance" and is used to evaluate whether an arrangement or instrument that is not included in the scope of the above provisions constitutes a securities. [twenty two]

When analyzing the economic essence of a transaction, the Howe Test focuses on the following elements: whether there is a capital investment in a common enterprise and whether the investor is based on reasonable profit expectations that comes from the entrepreneurial or management efforts of others (usually the project party). [23] Since the Pride case, the Supreme Court has distinguished investors' motivations (i.e., attracted by the "return on investment prospects" [24]) from consumers' motivations (i.e., for the purpose of using or consuming the purchased subject matter"). [25] The federal securities laws apply only to transactions in investment practices and do not apply to consumer transactions. [26]

As mentioned above, the buyer of an asset-guaranteed stablecoin does not purchase such stablecoins based on the profit expectations that others may bring about their entrepreneurial or management activities. The tool is not promoted in the market as an investment product, nor does it emphasize any profit possibility. [27] Instead, the motivation for the buyer to purchase asset-guaranteed stablecoins is to use them as "digital dollars" for payment or stored value, which behaves similarly to the scenario of using US dollars.

Therefore, this department believes that the issuance and sale of asset-guaranteed stablecoins do not constitute an investment contract and do not belong to securities under the Securities Law.

For further information, please submit an online request form at the following website and contact the Office of the Chief Legal Counsel of this department:

https://www.sec.gov/forms/corp_fin_interpretive

[1] In this statement, "crypto assets" refers to assets generated, issued and/or transferred through a blockchain or similar distributed ledger technology network, including but not limited to assets called "tokens", "digital assets", "virtual currencies" and "coins", and rely on cryptographic protocols to implement their functions. In addition, the "issuer" (issuer) referred to in this statement includes the issuer itself and its affiliates.

[2] This statement represents the views of staff at the Securities and Exchange Commission Department of Corporation Finance (hereinafter referred to as "This Department"). The statement does not constitute rules, regulations, guidance documents or formal statements of the U.S. Securities and Exchange Commission ("Committee"), nor has the Commission approved or rejected its contents. Like all employee statements, this statement has no legal effect **: It does not change or revise the existing laws, nor does it set new legal obligations to any entity.

[3] Unlike stablecoins supported by reserve assets, algorithmic stablecoins usually rely on specific algorithmic mechanisms to maintain price stability rather than real assets as reserve support.

[4] This department only expresses its views on the Covered Stablecoins described in this statement. This statement will not comment on other types of stablecoins, including but not limited to the following categories:

1. A stablecoin designed to anchor the value of non-USD reference assets (such as non-USD fiat currency, commodities, other crypto assets, etc.).
2. Use other stability mechanisms (such as algorithmic mechanisms) to achieve value-anchored stablecoins.
3. Although the value of the US dollar is anchored, it is not a stablecoin that redeems the US dollar when redeemed.
4. And stablecoins with income nature (the so-called "yield stablecoins"), including stablecoins that provide earnings, interest or other passive income to holders, whether the form of income is a regular payment or reward mechanism, or through a "re-basing", that is, a mechanism to automatically adjust the total supply of stablecoins.

[5] The views of this department do not have decisive effect, and it is impossible to ultimately determine whether a stablecoin (including asset-guaranteed stablecoin) constitutes a securities. The judgment on whether a stablecoin belongs to a securities requires factual analysis based on the specific characteristics of the stablecoin and its specific situation of issuance and sales. If the actual situation of a stablecoin is different from the one described in this statement, the department's judgment on whether it constitutes a securities may also be different.

[6] Examples of such low-risk and highly liquid assets include: dollar cash equivalents, current deposits of banks or other financial institutions, U.S. Treasury bonds, and money market funds registered under Section 8(a) of the Investment Companies Act of 1940. Excluding precious metals or other crypto assets.

[7] As stated in the “Legal Analysis” section below, the federal court will review the marketing method used when judging whether the issuer or promoter has issued or sold securities.

[8] Some asset-guaranteed stablecoin issuers may be subject to state legal supervision, and relevant state regulations may specify the types of assets allowed to be held in the reserve.

[9] Reves v. Ernst & Young, 494 U.S. 56 (1990). The federal court applies the standards established in the Reves case, not only to analyze "notes" but also to other financial instruments with debt characteristics. See, for example, In re Tucker Freight Lines, Inc., 789 F. Supp. 884, 885 (W.D. Mich. 1991) (The Court held that “the method in the Reves case applies to all debt instruments, including claims documents”). Since the issuer of asset-guaranteed stablecoin is subject to the redemption obligation, the stablecoin can be regarded as a debt of the issuer. Although asset-guaranteed stablecoins do not have all the characteristics of typical notes (such as no clear term, no agreed interest payment, etc.), this department still hopes to clearly point out that even if asset-guaranteed stablecoins are recognized as bills or claims certificates, their issuance and sale does not constitute the issuance and sale of securities, which is the view held by this department.

[10] SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The federal court usually applies both Reves and Howey tests when facts require them. For example, in the case of Banco Espanol de Credito v. Security Pacific Nat’l Bank, 763 F. Supp. 36 (2nd Cir. 1991), the court used both the Reves and Howey tests to make judgments.

[11] Reves, 494 U.S. pp. 64–66.

[12] Ibid., page 65. Notes excluded from the definition of "securities" include:

(1) Notes related to consumer financing;

(2) Notes guaranteed by housing mortgage;

(3) Short-term notes that are guaranteed by small businesses or their assets;

(4) Notes used for bank customers' "character loans";

(5) Short-term notes guaranteed by transfer of accounts receivable;

(6) Notes used to regulate the recording of book debts arising from commercial transactions;

(7) Loan notes provided by commercial banks for the daily operations of enterprises. [13] Ibid., pp. 66–67.

[14] See for example: SEC v. J.T. Wallenbrock & Associates, 313 F.3d 532, 537 (Ninth Circuit Court of Appeals, 2002): “Not meeting a single factor is decisive; the four factors should be considered overall.”

[15] Reves pp. 60; Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 812 (Second Circuit Court of Appeals, 1994).

[16] In relevant circumstances, we believe that the buyer should be given a higher weight for motivation. See, for example, Pollack, page 813 (the court held that the notes should be considered securities even if the seller’s motivations are different).

[17] For example, asset-guaranteed stablecoin issuers usually provide their products in the form of stored value products or prepaid products and comply with relevant state-level fund transfer laws.

[18] Reves, 494 U.S. p. 68.

[19] Ibid., pp. 68–69.

[20] Ibid., page 61. In Reves, the court held that there was no risk mitigation factor because the notes were “unsecured, uninsured” and noted that “if the Securities Act and the Exchange Act were not applicable, these notes would be completely out of the federal regulatory system” (p. 69). See also Pollack, 27 F.3d, page 814 (in an analysis of the fourth factor of Reves, noted that “the amendment complaint explicitly alleges that the share of the mortgage interest involved is ‘unsecured’ and ‘unsecured’”).