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Szczepanik warns some stablecoins are likely securities

Crypto-backed or algorithmic stablecoins could find themselves in the same position as the abortive Basis coin

Some stablecoins could find themselves in the Securities and Exchange Commission’s crosshairs, the agency’s “crypto-czar” told a crowd at the South by Southwest Conference in Austin on March 15.

Stablecoins can be divided into three categories said Valerie Szczepanik, associate director of the SEC’s division of corporation finance and senior advisor for digital assets and innovation. Those tied to a store of an asset like gold such as G-Coin (GCN), those tied to an escrow account of fiat currency like Gemini dollar (GUSD), and a third category she said “could raise issues under securities laws,” Decrypt reported.

This latter category is made up of crypto-backed or algorithmic stablecoins like Maker’s dai (DAI), which uses a variety of methods such as overcollateralization—depositing a cryptocurrency like Ethereum (ETH) worth substantially more (say 125 to 150 percent) than the value of the stablecoin bought, which can be liquidated if the price drops—Szczepanik said.

It is when a central authority controls price through a mechanism “tied to the issuance, creation or redemption of another type of digital asset,” or by keeping the price within a certain band controlled by “supply and demand in some way,” that a stablecoin “might be getting into the land of securities,” she noted.  

One such stablecoin, Basis, returned $133 million to investors and shut down in December 2018 after the SEC made clear that it would not be able to avoid being labelled a security. The coin, backed by investors like Google Ventures, Andreessen Horowitz, and Bain Capital, intended to remain “stable by incentivizing traders to buy and sell Basis in response to changes in demand… through regular, on-chain auctions of ‘bond’ and ‘share’ tokens, which serve to adjust Basis supply,” according to a letter from its creators on the website. “As regulatory guidance started to trickle out over time, our lawyers came to a consensus that there would be no way to avoid securities status for bond and share tokens.”

At SXSW, Szczepanik reiterated the advice she’s given on several occasions, that would-be coin issuers come to the SEC for advice before launching any new coins, including stablecoins.

Noting that the SEC would always look at how a coin works rather than what it’s called, she added that, “[w]e’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.”

Last week, the leading U.S. dollar-tied stablecoin, Tether (USDT) quietly announced that is not in fact backed exclusively by 1-to-1 deposits of Greenbacks in its escrow account, but may also be backed by “cash equivalents” including certificates of deposit, corporate notes, or the value of loans owed.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.