Stablecoins are Not Securities

Recently reading HR 5197, I am surprised how far stablecoins have come in two years and how some debates are still ongoing. This bill, introduced in Congress in November 2019, sought to have stablecoins defined as securities to put them under control of the SEC.

The "Managed Stablecoins are Securities Act" argued that a stablecoin is a security if its market value is determined by a managed basket of assets, including digital assets, and if the holder of a stablecoin receives a benefit as a result. What’s being described here is a mutual fund, not a stablecoin.

By definition a stablecoin’s value is stable—it does not appreciate or depreciate. As most retail stablecoins are pegged 1:1 with USD, a stablecoin is always worth a dollar. Now, the value of the dollar may vary, but that has nothing to do with stablecoin issuer or the coin itself.

So, if you buy a $1 worth of a dollar-pegged stablecoin and put it in your digital wallet for a few years, when you take it out, it’s going to be worth exactly the same: $1. You are not going to make any money out of this.

A stablecoin is a utility token, it is not a security. It’s job is to convey a stable value over time in transactions.

Stablecoins are akin to the National Bank Notes issued by national banks in the US from 1863 to 1933. Banks put up backing securities to issue dollar-denominated banknotes whose values were stable across time and space (across the US). National Bank Notes were recognized by Congress as currency. How are stablecoins fundamentally different?

What national banks in the past and stablecoins issuers today have in common is that are both producing a utility, not a security.

Yet, we continue to hear concerns voiced by some US government regulators that stablecoins may be securities, despite what the OCC has stated in the past.

My hope is that regulators are becoming more knowledgeable and will produce rules that make sense in the coming year.