SEC vs. Stablecoins: The debate over their status as securities or money heats up
Stabelcoins and decentralized finance (DeFi) have caught the attention of the Securities and Exchange Commission (SEC), as suggested by recent public and private dialogue by the Commission and its leadership. In fact, according to a report by investment bank Berenberg, it is, “much more likely that the SEC will focus on these areas following its recent enforcement actions against players in the cryptocurrency industry.” Stablecoins were even a topic of debate a few months ago when the U.S. House Committee on Financial Services discussed the Subcommittee on Digital Assets, Financial Technology and Inclusion discussed draft legislation related to stablecoins.
Federal Reserve Chair Jerome Powell and SEC Chair Gary Gensler have differing opinions on the viability of stablecoins as a form of payment and their classification as securities. Powell asserted his stance during a Capitol Hill hearing that stablecoins should be considered a form of money, emphasizing the importance of the central bank’s credibility. He argued that the U.S. central bank should have a “robust federal role” in overseeing stablecoins due to their potential to advance digital payment options, particularly since they are connected to the nation’s sovereign currency.
In contrast, the SEC has consistently maintained that any cryptocurrency beyond Bitcoin, Litecoin, Bitcoin Cash, and Ethereum should be classified as securities. This stance has led to legal disputes involving major platforms such as Binance, Coinbase, and Ripple. SEC Chair Gary Gensler has expressed the need to grant the Commodity Futures Trading Commission (CFTC) greater authority over non-security tokens.
Specifically, Gensler stated, “In 2022, Gensler mentioned that “I think the CFTC could have greater authority. They currently do not have direct regulatory authorities over the underlying non-security tokens.” He cited the example of TerraUSD, an algorithm-based cryptocurrency that deviated from its peg to the USD, as evidence of the risks associated with unregulated stablecoins.
Why do we care about Stablecoins and how they’re regulated?
The potential regulation of stablecoins is significant for several reasons. Stablecoins play a crucial role in facilitating DeFi and cryptocurrency trading. Their regulation will have a considerable impact on these domains, particularly affecting players in the ecosystem, including crypto exchanges and DeFi protocols. Berenberg pointed out that if U.S. regulators target stablecoins like USDC, it could significantly impact the revenue of platforms like Coinbase.
In the first quarter of 2023, Coinbase generated $199 million in net revenue, with approximately 27% coming from interest income earned on USDC reserves. Additionally, the note from Berenberg suggested that Bitcoin, affirmed by the SEC as a commodity rather than an unregistered security, is likely to benefit from the regulatory crackdown.
There is a belief that the SEC’s interest in regulating stablecoins stems from a desire to impact DeFi protocols indirectly. The ultimate classification of stablecoins as money, commodities, securities, or a combination thereof remains uncertain and will require legislative action down the road.
Regulating Stablecoins is inevitable
Regardless of which regulatory body should oversee them, it is increasingly clear that regulation is inevitable for stablecoins. The writing is on the wall, and exchanges and DeFi protocols should be prepared for this eventuality. There should be no surprises here as the looming regulatory action will undoubtedly have a significant impact on DeFi protocols and decentralized exchanges.
However, as with much of the recent rulings and enforcement by the SEC and others, ultimately, the regulation will create a more inviting and hospitable environment for institutional business and will foster the growth that we all know is possible for the ecosystem, mostly for participants who are willing and able to adapt to the regulatory landscape.
Originally published at https://www.thestreet.com on June 28, 2023.