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This week’s legal update is a deep dive into the SEC’s stablecoin guidance.

Let’s quickly discuss.

1/4: Covered Stablecoins

According to the Division’s statement, a “Covered Stablecoin” possesses these key characteristics: 

• Maintains a stable value relative to the U.S. dollar (1:1)

• Minted and redeemed for USD on demand on a one-for-one basis, with no limitations on quantity  

• Fully backed by reserves consisting of cash or low-risk, readily liquid assets like U.S. Treasuries

• Marketed strictly for payment, money transmission, or value storage purposes (not as investments).

Think of these as the “gold standard” stablecoins – they’re explicitly designed as a means of payment or “store of value”, not an investment vehicle. 

2/4: The Legal Tests, Reves and Howey

The Division then analyzed Covered Stablecoins under two cases — Reves v. Ernst & Young, 494 U.S. 56 (1990), and SEC v. W.J. Howey Co., 328 U.S. 293 (1946) — to determine whether Covered Stablecoins fall within the definitions of a “security” and an “investment contract.”

The Reves Test (Notes and Debt Instruments)

Under Reves’ “family resemblance” test, the Division evaluated Covered Stablecoins against four factors:

• Motivations of Buyers and Sellers: The Division noted that buyers use Covered Stablecoins to transact or store value — not to seek profit. Sellers use proceeds to fund reserves, not to finance general business operations.

• Plan of Distribution: Although widely available, Covered Stablecoins’ stable pricing mechanism discourages speculative trading.

• Reasonable Expectations of the Public: Covered Stablecoins are marketed as payment mechanisms, not investments.

• Risk-Reducing Features: The robust reserve mechanism — segregated, not used for speculation, and are bankruptcy-remote — reduces investor risk significantly.

On balance, the Division concluded that Covered Stablecoins resemble traditional commercial payment instruments more than investment securities.

The Howey Test (Investment Contracts)

The Division then evaluated whether Covered Stablecoins could be investment contracts under Howey. Under Howey, an investment contract is defined as:

• An investment of money;

• in a common enterprise;

• with a reasonable expectation of profits;

• derived from the efforts of others.

The Division concluded that Covered Stablecoins fail to meet the definition of an “investment contract” under Howey since Covered Stablecoins are used more like “digital dollars” than investments. Specifically, with respect to Covered Stablecoins, (i) buyers are not promised any return, (ii) marketing of Covered Stablecoins avoids investment language, and (iii) consumers typically use stablecoins like cash, not speculative assets.

3/4: Caveats and Continuing Uncertainty

It’s important to note that while this guidance is welcome, it is not binding. First, as the Division itself notes, the guidance is a staff statement, not a formal rule or regulation by the SEC. Regulatory determinations will continue to be evaluated on a case-by-case basis, as the statement explicitly notes that “the Division’s view is not dispositive of whether any stablecoin, including a Covered Stablecoin, is offered or sold as a security.” 

Finally, the statement specifically carves out algorithmic stablecoins, yield-bearing/rebasing stablecoins and stablecoins redeemable for non-USD assets from the definition of “Covered Stablecoins”, meaning that these stablecoins are still likely to be subject to regulation.

4/4: What This Means for Your Crypto Project

The Division’s statement is a major signal to stablecoin issuers and the wider digital asset community: the SEC is actively retracting their hostile agenda during the Gensler administration, and is actively working to provide clarity in the space. We should expect this trend from the SEC to continue — but only if they meet strict criteria. If you’re building or investing in the crypto space, here are some things you should consider:

• Reserve Management: For stablecoin issuers, the composition, segregation and management of reserve assets are critical factors. Reserve assets must be low-risk, liquid, and separate from operating capital.
  

• Stablecoin Integration: When selecting stablecoins to integrate with your project, prioritize those that meet the “Covered Stablecoin” criteria to minimize regulatory exposure. These stablecoins not only offer a reduced risk profile but also align with evolving legal frameworks, making them a sound choice for integration. For Product Design, understanding these parameters is crucial if you are designing products that interact with stablecoins. This knowledge can help you make more informed choices after consulting with legal counsel.
  

• Marketing is Key: Avoid any promotional language suggesting investment potential, returns, or participation in profits to lower the risk of regulation under Howey and Reves. For companies raising capital, clarity around how you discuss stablecoins in your ecosystem becomes increasingly important.

For more information regarding the SEC’s guidance on Stablecoins, please see the Division’s statement here. 

If you have questions about how this stablecoin guidance impacts your specific project, let's talk. We're in your DMs on Telegram, Discord, Slack — wherever you prefer — and are ready to provide practical advice that balances innovation with regulatory compliance.

We’ll be back with your next update in a week. Talk soon.

Nick Pullman
Day One Law

This article is for informational purposes only and is not legal advice. Please consult with an attorney at Day One Law Corp regarding your specific situation.