It is now the turn of stablecoins to come under the SEC scanner. According to reports, the SEC’s senior advisor for digital assets Valerie Szczepanik told audiences that stablecoins could raise regulatory issues under securities laws.

“I’ve seen stablecoins purport to control price through some kind of pricing mechanism, whether it’s tied to issuance creation or redemption of another type of digital asset tied to it or whether it is controlled through supply and demand in some way to keep the price within a certain band,” she told audiences at the recently-concluded SXSW conferences in Austin recently. Such projects with a central entity manipulating price levels to maintain their peg “might be getting into the land of securities” according to Szczepanik.  

With their peg to a basket of goods and low volatility, stablecoins serve a number of important functions within the crypto ecosystem. For example, they are frequently used as entryways into crypto because they are convertible to fiat currencies. In the absence of blockchains that communicate with each other, stablecoins are also used as rails to convert from one cryptoasset to another. Thus, in order to purchase Z-cash using Litecoin, a trader would need to convert the latter to a stablecoin and re-convert that coin back to Z-cash. Finally, they are also meant to fulfill bitcoin’s original promise of becoming a medium for daily transaction because their price movements move within a defined range. But maintaining the peg is essential to execute all the use cases above.  

For stablecoins backed by fiat currencies as collateral, that task is less complex as compared to stablecoins that have chosen unconventional assets as collateral or instituted new processes for parity. High-profile stablecoin startup Basis shut down after negotiations with the SEC regarding the status of its token. The startup’s model for functioning closely resembled that of the Federal Reserve. An algorithm, which controlled supply, was the fulcrum of a complex system that included Basis bonds and shares. MakerDAO, a stablecoin startup which uses other cryptoassets as collateral, is struggling to maintain parity with USD. Its developers are considering a fourth hike in as many months to the stability fee charged for financing its operations.

Categorization as a security would negatively affect stablecoin operations. It would mean increased compliance costs for them. Stablecoins do not offer the prospect of profits through volatile price swings because they trade at parity with respect to fiat currency. Instead investors consider them fixed-income returns generated through the fees they charge users. Traction is necessary to maximize the fee amount. Expensive regulatory costs could eat into their finances and make stablecoin operations unsustainable.