The U.S. Securities and Exchange Commission (SEC) has released a new set of guidelines clarifying that stablecoins backed 1:1 by USD and meeting certain conditions will not be classified as securities. These stablecoins will not be subject to traditional securities registration or reporting requirements. However, the guidance has stirred some internal disagreements within the SEC.

New Stablecoin Classification: "Covered Stablecoins"

In response to increasing calls for stablecoin regulation, particularly following President Trump’s urging to finalize stablecoin-related legislation by August, the SEC published its guidelines on stablecoin regulation, which took effect recently.

These guidelines introduce the concept of "Covered Stablecoins" (referred to as qualified stablecoins), which must meet the following key conditions:

1. Fully backed by fiat currency or high-quality, low-risk short-term assets.
2. 1:1 redeemability with USD.

Stablecoins meeting these criteria are not considered securities under U.S. securities laws and therefore do not require registration or compliance with reporting obligations.

David Sacks on the SEC’s Stablecoin Stance

David Sacks, a well-known figure in the U.S. crypto and AI space, expressed support for the SEC’s guidance. He highlighted that the SEC has now explicitly recognized that stablecoins backed by full reserves and designed to be USD-redeemable are not securities. This clarification, according to Sacks, will bring much-needed regulatory clarity to the stablecoin market.

The Five Key Criteria for "Covered Stablecoins"

The SEC’s guidelines clarify the following five conditions for a stablecoin to be classified as a "covered stablecoin":

1. Stable Value Maintenance: The stablecoin must be designed to maintain a stable value relative to the U.S. dollar, meaning 1 stablecoin equals 1 U.S. dollar.
2. No Interest or Profit: The stablecoin must not offer interest, returns, or any other type of profit to holders. It cannot represent a profit-sharing instrument or investment product.
3. No Investment Representation: The stablecoin should not represent an investment in the issuer or any third party, and should not imply any ownership or stake in the issuing company.
4. No Governance Rights: The stablecoin should not grant holders voting rights, governance power, or any decision-making authority regarding the issuing company or its operations.
5. No Financial Risk or Benefit from Issuer’s Performance: Stablecoin holders should not face financial risk nor gain benefits based on the financial performance of the issuer or any third party.

The SEC emphasizes that stablecoins marketed in alignment with these characteristics will not be classified as securities and will avoid regulatory requirements designed for investment products.

More Rigorous Reserve Asset Standards

The SEC has set stringent standards for the reserve assets backing these stablecoins:

• Reserve Isolation: The reserves supporting the stablecoin must be completely separated from the issuer's operational capital and cannot be used for lending, staking, or other investment activities.
• No Use in Company Operations: Reserve assets should not be used for the company’s operating expenses or business purposes.
• Third-Party Credit Protection: Reserves must be protected from claims by third-party creditors.
• Interest Income: While the reserve assets may generate interest income, this income cannot be distributed to stablecoin holders.

The SEC also encourages stablecoin issuers to publish regular Proof of Reserves to ensure transparency and verify the sufficiency of the reserves.

Potential Risks for Algorithmic Stablecoins

While the SEC’s guidance explicitly exempts fully backed, USD-pegged stablecoins from securities classification, the legal status of algorithmic stablecoins (like Terra and Frax) or stablecoins offering yields remains unclear. These types of stablecoins may still face the potential to be classified as securities due to their investment-like nature.

Stablecoins as a Tool to Strengthen Dollar Dominance

The SEC’s stance aligns with broader U.S. financial strategy, as seen in the GENIUS Stablecoin Act and the 2025 Stablecoin Act, which view stablecoins as tools for reinforcing the international dominance of the U.S. dollar. U.S. Treasury Secretary Scott Bessent has also stressed that stablecoins are critical to maintaining the dollar’s global leadership.

In line with this, the SEC mandates that reserve assets cannot be used for speculative purposes or market investments, positioning stablecoins as "digital dollar vehicles" rather than investment products.

Internal Disagreements at the SEC

However, the new guidelines have sparked internal disagreement within the SEC. Caroline Crenshaw, the only Democrat on the SEC, criticized the guidance for misrepresenting the risks of stablecoins. She argued that calling these private stablecoins "digital dollars" is misleading and downplays the inherent risks in the market. She cautioned that the SEC’s stance could create a false sense of security and stability, given that these coins are not backed by the full faith and credit of the U.S. government, unlike actual dollars.

Crenshaw’s criticism signals ongoing debates within the SEC about how to best regulate the growing and complex stablecoin market.

Conclusion:

The SEC’s new guidelines on stablecoins bring significant regulatory clarity for USD-backed stablecoins, helping establish a clearer framework for their operations and marketing. However, the classification of algorithmic and yield-bearing stablecoins remains unresolved, leaving them in a regulatory gray area. As the stablecoin market continues to grow, the debate over their role in the global financial system and their regulatory oversight is likely to persist, especially with political and internal regulatory tensions surrounding their true nature and risks.