From Penalty To Parity: The SEC Rethinks Stablecoin Risk

The Securities and Exchange Commission (“SEC”) has signaled the lowering of a major regulatory barrier for the institutional adoption of stablecoins. On February 19, SEC Commissioner Hester M. Peirce released a  Statement  addressing how broker-dealers must account for stablecoins on their balance sheets under the Net Capital Rule (Rule 15c3-1), while the SEC Division of Trading and Markets (“DTM”) issued a related  FAQ. This guidance conveys that the SEC “will not object if a broker-dealer treats a proprietary position in payment stablecoin as having a ‘ready market’ under Rule 15c3-1, and takes a haircut of 2% of the market value of the greater of the long or short proprietary position in payment stablecoin in calculating its net capital.” Proprietary positions are positions held by a firm for its own account, not those held on behalf of customers. While the guidance is non-binding and is not currently reflected in formal provisions under Rule 15c3-1, as Commissioner Peirce notes, it “shed[s] light on the staff’s thinking about emerging issues.” To that end, Commissioner Peirce invited input from market participants regarding formal modification of Rule 15c3-1 in this connection.

Under Exchange Act Rule 15c3-1, broker-dealers must maintain minimum net capital (i.e., a liquidity cushion to protect customers if the firm gets into financial trouble). When calculating that cushion, the firm must apply "haircuts" to different assets on its books, reducing their counted value towards net capital to reflect asset risk. Assets that are deemed to be safe and liquid are subject to a relatively small haircut, while more risky, volatile assets are subject to a bigger one. Due to the general lack of regulatory clarity surrounding stablecoins, some broker-dealers erred on the safe side and self-imposed a 100% haircut on their stablecoin holdings (i.e., the stablecoins did not count toward the minimum net capital requirement at all). This meant that to hold stablecoins without the risk of breaching minimum net capital thresholds, those firms had to hold an equivalent amount of  other  qualifying assets — making stablecoin positions prohibitively expensive to carry on their balance sheets. 

The guidance defines “payment stablecoin” by reference to the GENIUS Act. This implicit nod to the GENIUS Act sheds light on why the Commission is currently amenable to a mere 2% haircut for proprietary stablecoin holdings, aligning stablecoins with other low-risk, cash-equivalent instruments and well below the 15% haircut generally applied to equity securities. Under the GENIUS Act, qualifying payment stablecoins are backed 1:1 by highly liquid, reliable reserve assets such as United States Treasury Bills. This signals that the current DTM staff views a GENIUS Act-compliant payment stablecoin as carrying no materially greater risk than the reserve assets backing it. Commissioner Peirce has categorized a 100% haircut for payment stablecoins as “unnecessarily punitive” given the underlying reserve assets that back them.

The staff’s amenability to a 2% haircut on GENIUS Act-compliant payment stablecoin proprietary positions increases the commercial viability of such holdings for broker-dealers. Commissioner Peirce’s statement also recognizes that stablecoins are not speculative assets to be penalized, but essential to broker-dealers’ next-generation business activities relating to tokenized securities and other crypto assets. This new guidance helps lower the barrier for broker-dealers looking to advance their activities in this space. 

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