PERSPECTIVE: Are Some Stablecoins in Danger of Being Classified as a Security?
In what is turning out to be one of the big puzzles of 2019, people are again scratching their heads trying to ascertain what exactly IS a stablecoin, why certain coins should qualify as stablecoins when others do not, and what the U.S. Securities Exchange Commission (SEC) is going to say about this new category of cryptocurrency. In fact, the legal status of stablecoins has been a topic of serious discussion since mid-2017.
At this year’s SXSW festival, held in Austin, Texas in mid-March, Valerie Szczepanik, the SEC’s newly appointed “Crypto Czar”, took part in a forum where she spoke candidly about a number of subjects in the cryptocurrency realm. But certainly, the comments that have drawn the most interest are her thoughts on stablecoins.
Holding the title of Senior Advisor for Digital Assets for the SEC and a seasoned SEC attorney for nearly 20 years, Ms. Szczepanik told a crowd of crypto enthusiasts that there are many stablecoins in the market currently that might be “in direct conflict with some of today’s existing securities laws.”
During the event, she essentially broke down stablecoins into 3 categories:
1) Stablecoins that are directly linked to some physical asset such as gold or real estate;
2) Stablecoins that are tied to a fiat currency such as the US dollar or the Euro; and
3) Stablecoins that make use of “self-styled” pricing mechanisms to control their values.
According to Szczepanik, it is this third category that is drawing the interest of the SEC.
“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” stated Szczepanik.
She went further, opining that some type of projects, where a single party or company could control the price fluctuation over time, would be treading into the realm of securities.
While stablecoins as a whole exist in a yet-to-be-defined legal status, it is algorithmic stablecoins that are troubling her as they are not backed by any collateral whatsoever. However, she was quite clear that it didn’t matter how an entity labelled itself, its blockchain or its business model, they would all be subject to the same process of approval.
“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.” *source
This is certainly not an idle threat. In December 2018, the stablecoin project Basis closed their operations and refunded investors over $135 million after learning that the SEC would probably classify the coin as a security.
It’s these kinds of projects, “where there is one central party controlling the price fluctuation over time,” that Szczepanik said “might be getting into the land of securities.”
What does that mean for Ormeus and the OMC coin?
With the Ormeus Cash Coin (OMC), there isn’t one central controlling party. OMC will have smart contracts dictating rules, mainly to counter huge price dips, not control the price within narrow price bands.
OMC was never an ICO, which is another key indicator of securities status. Also, OMC has no guarantee of making a profit, as it will be subject to market forces. A similar status has been integral in the SEC stating in public comments that they did not see Ethereum falling within Securities guidelines.
The legal status of some stablecoins has long been a topic of discussion, especially the class of “algorithmic stablecoins” that aren’t backed by any collateral at all. OMC, being collateral-backed, doesn’t fall into this category.
The SEC’s “crypto czar” said that it all comes down to the expectations that stablecoin issuers impart on their buyers: “You’re talking about folks who are buying into that system, 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.”
Stablecoins were conceived as an answer to the price fluctuations that many types of cryptocurrency suffer from. Bitcoin, which was originally conceived as a token to replace fiat in transactions, has had multiple price fluctuations in the range of 35% annually over the past several years. Not to mention its current drop of nearly 80% from its highest value in 2017. It was a need to develop a more stable financial asset that drove the creation of stablecoins.
Ormeus’ OMC coin is labelled as a “transactional coin” which is a fairly new designation to differentiate its purpose from other types of stablecoins. OMC is designed to serve as an asset-backed virtual currency with a stable transactional price. By over-collateralizing its reserves, OMC positions itself to become a principal asset in the online retail marketplace. OMC bases its viability on a Proof of Asset protocol, where mining assets are continually monitored and remotely appraised in real time through its unique Reserve Vault System.
Many (for example, Ripple) are anxious to see how the SEC will judge their coin with regard to the long-standing Howey Test, established by the Supreme Court as a guideline for securities. Others, such as OMC, have been developed to specifically meet the Howey Test guidelines and are confident that their structure and design falls comfortably within existing safety parameters.
As a coin designed for international retail transactions, holding OMC is not a guarantee of any kind of profit. While it is elastic in its coin supply, the price is not controlled by one central party, but rather a combination of factors including market forces, market adoption and volume/use, which will all have more determination on price than any mechanisms used by de-centralized smart contracts or rules governing OMC. Combined with their unique Point of Sale retail system, OMC is moving forward to stake out its position in the online retail marketplace.
While many wonder over the status of stablecoins which do not follow long- established court guidelines, Ormeus and its OMC token are moving confidently forward and creating a system to integrate cryptocurrency into the retail marketplace.
