By John Filar Atwood
In a letter to SEC Chair Gary Gensler, several industry groups urged the SEC to review stablecoins such as USD Coin and Thether and other digital assets to ensure they are complying with the federal securities laws. New carve-outs or exemptions to facilitate digital asset offerings would be a mistake, in their view. The signatories were Americans for Financial Reform Education Fund, Better Markets, Consumer Federation of America, Public Citizen, Revolving Door Project, and Arthur E. Wilmarth, Jr. Professor Emeritus of Law at George Washington University.
The group noted in the letter that for decades regulators and the courts have guided companies on what constitutes a security based on tests set forth by the Supreme Court. In their view, many existing digital assets meet the definition of a “security” under these longstanding Supreme Court standards but are offered without registration with the Commission. Moreover, those acting as brokers, custodians, exchanges, and providing other products or services related to those securities are not registering with the Commission and are not complying with basic investor and consumer protections provided by the federal securities regulations.
USD Coin and Tether. The group stated that the two largest stablecoins, USD Coin and Tether, create significant risks to investors. Based on the features of USD Coin as disclosed by Circle Internet Financial, LLC in July, the group believes it looks remarkably similar to another class of pooled investment products—money market funds.
They argued that the holdings, marketing, and purported uses of USD Coin appear to draw parallels to both money market funds and bank deposits, and yet neither the stablecoin nor its dealers are complying with the securities or banking laws. In addition, unlike money market mutual funds that primarily hold short-term and low-risk investments, USD Coin holds as much in corporate bonds as several hedge funds, and such debt may be subject to sharp losses in price or subject to ratings downgrades, they added.
Regarding Tether, the group noted that its limited disclosures are alarming because the stablecoin appears to have large holdings of commercial paper, secured loans, corporate bonds, funds, and precious metals. They argued that the company’s lack of disclosure and aggressive legal maneuvering have given rise to speculation that Tether’s “reserves” may not be tied one-to-one with the dollar value of Tether outstanding and may be invested in assets that are not cash or cash equivalents.
Lending services and exchanges. The group also discussed the risks of lending services related to digital assets, which often are marketed as offering very attractive yields. The group noted that digital asset exchange Coinbase has disclosed that the SEC is considering recommending an enforcement action against the company regarding its proposed digital asset lending product. If Commission action is warranted with Coinbase, it is probably warranted with other lending arrangements, the group said.
The group believes that many digital asset exchanges are trading securities. As specific digital assets are identified as securities, the group urged the Commission to move quickly to identify market participants who are providing products and services related to those securities, and bring them into the federal securities regulatory regime, including registration requirements, rules related to governance and operations, and the antifraud rules.
The group also pointed out that press reports and studies have established that several foreign brokers, custodians, and exchanges for digital assets are permitting trading activity by U.S. investors and customers without regulatory compliance. Digital asset exchange FTX was identified as likely illegally providing trading services to U.S. customers, but is still aggressively seeking to expand its U.S. investor footprint, the group noted. The group asked the SEC to consider how advertisements by foreign digital asset entities are impacting investors, and whether these new investors trading in prohibited assets.
Lack of investor awareness. Some investor-facing digital asset companies are affiliated with registered entities such as broker-dealers, the group continued, so investors may be unaware of the differences in their level of protections and rights. If certain digital assets and the products and services provided are not currently within the SEC’s clear authority, the group suggested that the Commission ensure that investors are well informed that they are not working with SEC-regulated entities.
Investors in digital assets should know that their service providers may not be subject to the fiduciary duties that accompany securities-related activities, including brokers’ duty of best execution, the group stated. In addition, digital assets may not be subjected to the same custody and capital safeguards as securities, thus subjecting the investors to potentially much greater risk of loss if a service provider experiences financial strains, they noted.
Any actions taken by the SEC will not preclude other regulators from exercising their statutory authority with respect to stablecoins and other digital assets, the group noted. At the same time, the fact that many digital assets raise concerns under banking and other laws should not deter the SEC from fulfilling its statutory mandate to protect investors in securities, the group concluded.