SEC Commissioner critiques stable coin analysis, stating it downplays risks

United States Securities and Exchange Commission (SEC) Commissioner Caroline A. Crenshaw recently criticized the Division of Corporation Finance’s analysis of stablecoins, arguing that the risks associated with these coins are understated.

In its analysis, the Division specifically focused on “Covered Stablecoins,” defined as stablecoins designed to maintain a one-to-one value with the US Dollar (USD) and backed by low-risk, liquid assets. However, Commissioner Crenshaw pointed out several key issues with this analysis.

One major concern highlighted by Commissioner Crenshaw is the role of intermediaries in the distribution and redemption of stablecoins. She noted that over 90% of USD-stablecoins are distributed to retail purchasers through intermediaries like crypto trading platforms, rather than directly from issuers. This means that holders of stablecoins purchased through intermediaries can only redeem them through these third parties. Additionally, these intermediaries are not obligated to redeem the stablecoin at its full value, potentially leading to smaller payouts for holders.

Another area of contention is the notion of issuer reserves as a risk-reducing feature. The Division claimed that issuer reserves are meant to satisfy redemption obligations, but Commissioner Crenshaw argued that retail holders have no direct access to these reserves. Furthermore, she raised concerns about the lack of regulatory oversight and reliability of reports on these reserves, questioning their ability to guarantee redemption at any price, especially during market stress.

Commissioner Crenshaw also warned of potential “run” scenarios where issuers and intermediaries may be unable to honor redemption requests, leading to broader market consequences. She emphasized that the solvency of an issuer cannot be guaranteed solely based on its reserves, especially during times of market turmoil.

From a legal standpoint, Commissioner Crenshaw criticized the Division’s analysis under the Reves test, which looks at risk-reducing features when determining if an asset is a security. She argued that the criteria for determining a “Covered Stablecoin” is flawed, as it wrongly assumes that retail coin holders have redemption rights against issuers when, in reality, they do not. This oversight fails to consider the critical role intermediaries play in the distribution and redemption processes.

In conclusion, Commissioner Crenshaw called for a more accurate assessment of the risks associated with stablecoins to protect investors and promote the public interest. She stressed the importance of understanding the complex dynamics of stablecoin markets and urged for better regulatory oversight to safeguard investors’ interests in this rapidly evolving sector.