Disclosure: The perspectives shared in this article are solely those of the author and do not reflect the opinions of the editorial team.
In response to World Liberty Financial’s announcement about the introduction of the USD1 non-interest-bearing stablecoin on April 4, 2025, amid a tariff-driven stock market plunge that resulted in a staggering $6.4 trillion loss, marking the beginning of what Wall Street refers to as a bear market, the US Securities and Exchange Commission released a notice. This notice outlined a framework for a more regulated and stable digital asset environment, indicating that “Covered Stablecoins,” which are tokens supported by physical fiat or highly liquid assets redeemable at a rate of 1:1 with the US dollar, are not classified as “securities.” Additionally, individuals engaged in the processes of “minting” (creating) and redeeming Covered Stablecoins are exempt from reporting stipulations.
The SEC’s guidance identifies examples of liquid assets that should back a Covered Stablecoin, including cash equivalents in USD, demand deposits at banks or financial institutions, US Treasury securities, and/or money market funds that comply with Section 8(a) of the Investment Company Act of 1940. Precious metals and other cryptocurrencies are specifically excluded from this definition. Issuers of Covered Stablecoins are prohibited from mixing asset reserves with operational funds or providing token holders with interest, profits, or yield opportunities. Furthermore, these issuers must not employ their reserves for investment or market speculation activities.
Algorithmic stablecoins, which aim to maintain their US dollar value through software or automated trading strategies, fall outside the definition of Covered Stablecoins, thereby leaving the regulatory status of algorithmic stablecoins, synthetic dollars, and yield-bearing fiat tokens in a state of ambiguity.
In the US, industry executives are advocating for regulatory reforms that would enable stablecoin issuers to offer yield opportunities to stablecoin holders and pay interest. The first interest-bearing stablecoin was approved by the SEC and registered as a security recently. Tim Bailey, VP of Global Business and Operations at Red Date Technology, remarked:
“We recognize a market demand for government-regulated fiat-backed stablecoins, and believe this will drive the next wave of innovation in financial services. Our UDPN Stablecoin Management System is perfectly equipped to assist regulated stablecoin issuers in launching and managing these new services.”
Another company, M^0, is working on a programmable stablecoin platform with Solana, facilitating builders in creating feature-rich, branded digital currencies on one of the most scalable blockchains by providing building blocks for digital dollars, boasting a hassle-free yield proxy without complicated agreements for yield distribution. Joao Reginatto, Chief Strategy Officer at M^0 stated:
“Solana’s unparalleled speed, scalability, and developer ecosystem position it as an exceptional environment for stablecoin innovation. By integrating M^0’s platform with Solana, we empower developers to create stablecoins that are not only interoperable and liquid but also specially designed for their intended applications and capable of performing at any scale. This development marks a significant step towards M^0’s goal of establishing the most comprehensive technological foundation for digital money creators.”
Stablecoins as safe haven investments
Amid the stock market turmoil, surprisingly, the US dollar weakened against the traditional safe-haven Swiss franc as fears of a global recession escalated following the implementation of extensive tariffs by US President Donald Trump on trading partners. This situation brought into question the informal status of the US dollar as the world’s reserve currency, which is largely due to its relative stability compared to other currencies. Additionally, contrary to expectations, the price of gold decreased instead of increasing as investors turned away from gold, a historically sought-after asset for preserving wealth.
Instead, many investors gravitated towards stablecoins, with Tether (USDT) leading with a valuation of $144 billion. Although the overall cryptocurrency market cap dropped by 18%, the stablecoin sector demonstrated notable resilience, according to Finance Magnates. The total market capitalization for stablecoins exceeded $230 billion, representing a 56% rise compared to the previous year, outstripping Bitcoin’s (BTC) pricing trend. This trend indicates an increased demand for stablecoins as safe haven assets during the stock market decline, underscoring the timely nature of the SEC’s stablecoin guidance.
In an interview, William Quigley, a co-founder of Wax and Tether, explained that during downturns in the market, there is often a rush to purchase Tether as a protective measure, causing its price to slightly exceed one dollar. This pattern reflects conventional currency trading behaviors, where economic forces dictate value rather than a strict peg. It is important to note that USDT is not strictly pegged to the US dollar. “Tether does not maintain a peg. We do not enforce a peg.” The term “pegged” implies a rigorous one-to-one price ratio enforced at all times—something Tether does not follow. Rather, Tether can be redeemed for a dollar, which allows its market price to fluctuate based on supply and demand.