By Commissioner Caroline A. Crenshaw
The Division of Corporation Finance issued another installment today (April 4) [1] in its ongoing statement series dedicated to jurisdictional carve-outs for crypto.
This one opines that certain so-called “stablecoins” are not securities. What’s remarkable about this statement is not so much its ultimate conclusion, but the analysis staff relies on to get there. The statement’s legal and factual errors paint a distorted picture of the USD-stablecoin market that drastically understates its risks.
Much of the staff’s analysis is premised on issuer actions that supposedly stabilize price, ensure redeemability, and otherwise reduce risk. Staff also acknowledges, albeit briefly, that some USD-stablecoins are available to retail purchasers only through an intermediary and not directly from the issuer.
But it is the general rule, not the exception, that these coins are available to the retail public only through intermediaries who sell them on the secondary market, such as crypto trading platforms. Over 90% of USD-stablecoins in circulation are distributed in this way.[2] Holders of these coins can redeem them only through the intermediary.
If the intermediary is unable or unwilling to redeem the stablecoin, a holder has no contractual recourse against the issuer. The role of intermediaries, particularly unregistered trading platforms, as primary distributors of USD-stablecoins poses a panoply of significant, additional risks that staff does not consider.[3]
Staff fails to unpack the consequences of this market structure and how it affects risk. The fact that intermediaries conduct most retail USD-stablecoin distribution and redemption significantly diminishes the value of the issuer actions staff relies on as “risk-reducing features.”
Key among these features is an issuer asset reserve that staff describes as designed to “satisfy fully their redemption obligations,” i.e., with enough assets to pay out a $1 redemption for each outstanding coin. But generally speaking, as described above, issuers have no “redemption obligations” to retail coin holders. These holders have no interest in or right to access the issuer’s reserve.
If they redeem coins through an intermediary, they are paid by the intermediary, not from the issuer’s reserve. The intermediary is not obligated to redeem a coin for $1 and will instead pay the holder the market price. Retail coin holders therefore do not, as staff claims, have a “right[]” to “redemption for USD on a one-for-one basis.”
It is also grossly inaccurate for staff to suggest that just because an issuer’s reserve is, at some point, somehow valued at or above the par value of its outstanding coins, the issuer has sufficient reserves to satisfy unlimited redemption requests (from intermediaries or coin holders) at any future time.
First, the issuer’s overall financial health and solvency cannot be judged by the value of its reserve, which tell us nothing about its liabilities, risk from proprietary financial activities, and so forth. Second, there is always a risk, particularly in times of market stress or if the price of a stablecoin drops, of a “run” scenario where intermediaries and/or issuers cannot honor all redemption requests in real time.[4]
This leads to a “self-reinforcing cycle of redemptions and fire sales of reserve assets.”[5] Major run events have already occurred with USD-pegged stablecoins, with significant consequences for the broader stablecoin market and the traditional banking system.[6]
Staff further overstates the assurance value of issuer reserves by claiming that some issuers publish reports, called “proof of reserves,” that “demonstrate that a stablecoin is backed by sufficient reserves.” As the SEC and the PCAOB have warned, proof of reserve reports demonstrate no such thing.
Their content is unregulated, not subject to PCAOB standards, and determined entirely at the issuer’s discretion. They are “typically [ ] not designed to” and “often provide no assurance as to the reliability of the information provided.”[7] Other regulators have similarly warned of the general lack of transparency and reliability in how stablecoin reserves are invested, managed, and valued.[8] Whatever claims issuers make about their reserves, stablecoin holders have unfortunately learned the hard way that these claims often turn out to be false.[9]
Understanding these facts, it becomes clear that as a legal matter, staff is simply wrong that the issuer’s reserve is a “risk-reducing” feature under the Reves test. Risk-reducing features under Reves include collateralization, insurance, or federal regulatory oversight.[10] Because retail coin holders generally have no right to access the issuer’s reserve to guarantee redemption at any price, let alone $1, the reserve does not “collateralize” stablecoins held by the retail public.[11]
Without a redemption right against the issuer, a retail stablecoin holder has no claim in a bankruptcy proceeding, as an unsecured creditor or otherwise, if the issuer becomes insolvent.[12] Just like the product at issue in Reves, USD-stablecoins are “uncollateralized and uninsured.”[13]
Even intermediaries responsible for retail redemptions may not be secured creditors of the issuer, meaning they too would have limited or no ability to recover directly from the reserve if the issuer declares bankruptcy. The contractual arrangements between issuers and intermediaries are bespoke and generally non-public, leaving retail coin holders (and regulators) in the dark.
The statement also presents a practical problem: what if any existing stablecoins actually meet the stated criteria and fall within the staff’s definition of “Covered Stablecoin”? It is hard to even understand what staff’s criteria are because the statement is written as though issuers have redemption obligations directly to retail coin holders when in general, they do not.
For example, staff claims that issuers stabilize the price because they “mint[ ] and redeem[ ] Covered Stablecoins on a one-for-one basis with USD at any time and in unlimited quantities.”
But staff fails to explain if or how that occurs in the typical case of a USD-stablecoin that is purchased and redeemed by retail holders only through intermediaries. To the extent distribution and redemption affect the retail market price, it is the intermediaries, not the issuers, whose actions matter. What are the practices and obligations of those intermediaries? Is that information disclosed to the retail public? Staff gives us no idea.
These legal and factual flaws in the staff’s statement do a real disservice to USD-stablecoin holders, and, given the central role of stablecoins in the crypto markets, to crypto investors more generally.
They feed a dangerous industry narrative about the supposed stability and safety of these products. This is perhaps best highlighted by the staff’s choice to parrot a highly misleading marketing term, “digital dollar,” to describe USD-stablecoins. Make no mistake: there is nothing equivalent about the U.S. dollar and unregulated, privately-issued crypto assets that are opaque (clearly even to the staff), uncollateralized, uninsured, and laden with risk at every step of their multi-layer distribution chain. They are risky business.
Caroline A. Crenshaw was unanimously confirmed by the U.S. Senate, and sworn into office as Commissioner of the U.S. Securities and Exchange Commission on August 17, 2020.
[1] The timing of today’s statement – issued as the country is reeling from market turmoil not seen since the early days of COVID-19 – calls into question how the Commission is choosing to deploy its increasingly limited staff resources.
[2] This includes, for example, both USDC and USDT, which together make up more than 90% of outstanding market share. See Yahoo Finance, USD Coin and USDT stablecoins occupy 90% market share: Report (Mar. 18, 2025); Federal Reserve, Primary and Secondary Markets for Stablecoins(Feb. 23, 2024).
[3] See IOSCO Policy Recommendations for Crypto and Digital Asset Markets Final Report, pp. 9, 71-72 (Nov. 16, 2023) (“The majority of stablecoin distribution[ ] [ ] occurs on secondary markets through [crypto asset service providers] and clients may not be aware of what rights they have and do not have against a stablecoin issuer … [i]n many stablecoin structures, the stablecoin issuer will allow only larger institutions and crypto-asset trading platforms to interact directly with the stablecoin issuer to create and to redeem stablecoins … [this] creates conflicts [of interest between the issuer and intermediary] and gives rise to potential misuse of inside information, market manipulation and other misconduct”); SEC Office of Investor Education and Advocacy, Exercise Caution with Crypto Asset Securities: Investor Alert (Mar. 23, 2023) (“crypto asset securities trading platforms or other intermediaries (such as so-called ‘crypto exchanges’) may offer a combination of services that are typically performed by separate firms that may each be required to be separately registered with the SEC, a state regulator, or a SRO. The commingling of these functions, exchange, broker-dealer and custodial functions, for example, creates conflicts of interest and risks for investors ….”).
[4] See IOSCO Policy Recommendations for Crypto and Digital Asset Markets Final Report, infra n3, at 70-71 (“stablecoins are vulnerable to runs in times of stress, in a similar way to money market funds”).
[5] See President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Report on Stablecoinsat 12 (Nov. 2021).
[6] See Federal Reserve, Primary and Secondary Markets for Stablecoins, infra n2.
[7] See SEC Office of Investment Education and Advocacy, Investors in the Crypto Asset Markets Should Exercise Caution With Alternatives to Financial Statement Audits: Investor Bulletin (July 27, 2023); PCAOB Investor Advisory, Exercise Caution With Third-Party Verification/Proof of Reserve Reports (Mar. 8, 2023) (Proof of reserve “reports do not provide any meaningful assurance to investors or the public,” and “do not provide assurance that [ ] reserves will be adequate as of the date of the PoR Report, in the future, or that customer assets will be protected.”).
[8] See IOSCO Policy Recommendations for Crypto and Digital Asset Markets Final Report, infra n3, at 24, 71-72.
[9] See, e.g., SEC v. TrueCoin LLC and TrustToken, Inc.(complaint filed Sept. 24, 2024) (stablecoin issuers settled to allegations of fraud based on misrepresentations concerning their reserve assets).
[10] See Reves v. Ernst & Young, 494 U.S. 56, 69 (1990).
[11] See Black’s Law Dictionary, “Collateral” (12th ed. 2024) (defined as “[p]roperty that is pledged as security against a debt; the property subject to a security interest or agricultural lien.” (citing UCC Article 9-102(a)(12)); SEC v. Wallenbrock, 313 F.3d 532, 539 (9th Cir. 2002) (“here the so-called collateralization appears to be a fiction … investors had no way of reaching the assets.”).
[12] See Adam Levitin, The GENIUS Act: Insolvency Risk with Stablecoins (Mar. 2, 2025).
[13] See Reves, 494 U.S. at 69.
