US SEC’s Valerie Szczepanik: Some stablecoins could raise issues under securities law

The legal status of stablecoins has been disputed for quite some time now. However, in what could be a new episode in the issue, the Securities and Exchange Commission [SEC]’s advisor for Digital Assets, Valerie Szczepanik, informed crypto enthusiasts that some types of stablecoins “could raise issues under securities laws,” reported Decrypt media. The SEC has been dealing with regulations relating to cryptocurrencies and the addition of more stablecoin projects will put the SEC in a difficult position.

Speaking at the SXSW Conference in Austin, 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. She said,

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

Szczepanik said,

“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.”

Even though stablecoins have a conflicted legal status, “algorithmic stablecoins” are the troubling issue as they are not backed by any collateral whatsoever. The advisor 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. She added,

“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.”

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

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