Stablecoins are they securities?

Written by James Ramsden KC, Astraea Group

Although at a glance, quite a dry “black letter” topic the question of whether earning interest from stablecoins might mean they are a “security” has a practical importance for anyone who owns them. A stablecoin per se is not a security. Is there any risk it becomes one if you earn interest on it? In recent years the SEC has brought proceedings against the issuers or sponsors of various cryptocurrencies on the basis that the cryptocurrencies are securities that have not been properly registered or distributed in accordance with US federal law on securities. This has included; Bitcoin, Binance, XRT (SEC v Ripple), Luna (SEC v Terraform).

In order to determine if a digital asset is a security US courts and the SEC have relied upon the US Supreme Court’s Howey Test to analyse whether a cryptocurrency is an “investment contract” and therefore a security. The test has 4 limbs; an investment contract will exist if: “A person [1] invests his money [2] in a common enterprise and [3] is led to …