SEC Advisor Says Some Stabecoins Might be Violating Securities Laws

News and Analysis

In what could be a new turn in the discussion about the legal status of stablecoins, the U.S. Securities and Exchange Commission’s advisor for Digital Assets, Valerie Szczepanik suggested that certain types of stablecoins “could raise issues under securities laws.” 

As reported by Decrypt media, Szczepanik divided stablecoins into three categories: stablecoins “tied to some real asset, like real estate or gold and oil, coins linked to a fiat currency held in reserve, and a third category that could cause problems under the law.

“I’ve seen stablecoins that purport to control price through some kind of pricing mechanism, whether it’s tied to the issuance, creation or redemption of another type of digital asset tied to it, or whether it is controlled through supply and demand in some way to keep the price within a certain band,” she said at the SXSW Conference in Austin on Friday.

Szczepanik further explained that projects, where one central party could control the price fluctuation over time, might be stepping in the area of security. Correspondingly, the SEC will have to look into the facts and circumstances of each project. According to the advisor, it will all come down to the expectations that stablecoin issuers impart on their buyers.

“You’re talking about folks who are buying into that ecosystem or are buying this coin with the expectation that somebody else is going to be holding a profit or guaranteeing a profit or holding the price at a certain level. Again, that could raise issues under securities laws,” Szczepanik said.

Even though stablecoins have a conflicted legal status, “algorithmic stablecoins” are the troubling issue as they are not backed by any collateral whatsoever. Szczepanik said that it did not matter what label a blockchain business put on their token, stablecoin or otherwise, it will be subjected to the same inspection.

“Folks like to put labels on things, but we’ll always look behind the label to see exactly what’s happening. So you can call it a utility coin, call it a stablecoin, call it a consumptive coin or some other coin. We’re going to look at the characteristics. What’s the economic reality? What’s happening with the transactions involving the coin? And we’ll give it the label that it deserves under the law,” she added.

Szczepanik advised crypto startups to ask for permission, and not forgiveness from the SEC.

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