The debate is a distraction. Regulators are fighting over which 20th-century agency framework applies, while the 21st-century risk is in the on-chain collateral and settlement mechanisms. The classification of a stablecoin as a security or commodity is irrelevant if its underlying reserves are opaque or its mint/burn logic is flawed.
the-stablecoin-economy-regulation-and-adoption
Blog
Why the CFTC vs. SEC Debate Misses the Point of Stablecoins
Regulators are trapped in a 20th-century legal cage fight over 'security' vs. 'commodity' classification. This ignores the first-principles reality: stablecoins are a new form of privately issued digital money, demanding a bespoke regulatory regime focused on payment system integrity, not investment contracts.
introduction
THE REGULATORY MISMATCH
Introduction
The CFTC vs. SEC jurisdictional fight is a distraction from the real systemic risk posed by stablecoin design.
The real risk is technical, not legal. The failure modes for USDC or DAI are not securities fraud; they are smart contract exploits, oracle manipulation, or reserve asset de-pegs. The 2022 UST collapse demonstrated that algorithmic design flaws are the primary vector for systemic contagion, not regulatory arbitrage.
Evidence: The $40B USDC de-peg during the SVB crisis was a liquidity and messaging failure, not a securities law violation. The stablecoin’s value was restored by Circle's off-chain banking actions, proving that real-world asset (RWA) management is the critical failure point regulators should audit.
key-insights
THE REAL BATTLEGROUND
Executive Summary
The regulatory turf war over 'security' vs. 'commodity' classification is a legalistic sideshow that ignores the systemic infrastructure battle.
01
The Problem: Regulatory Theater
The SEC/CFTC debate fixates on issuer liability, a 20th-century framework. The real risk is in the automated settlement layer—the smart contracts and oracles that manage $150B+ in stablecoin value. Regulating the paper, not the protocol, is like policing banknotes but ignoring the payment network.
$150B+
TVL at Risk
0
Settlement Laws
02
The Solution: Regulate the Rail, Not the Receipt
Focus on the infrastructure providers: the validators of Circle's CCTP, the oracles for DAI's PSM, and the governance of Aave's GHO. Mandate real-time attestations, circuit breakers, and capital requirements at the protocol layer, creating a resilient DeFi-native regulatory stack that survives any single issuer's failure.
24/7
Attestations
<2s
Circuit Breaker
03
The Precedent: Payment Systems > Securities
Stablecoins are digital bearer instruments, not investment contracts. Their primary use is settlement and collateral, not yield. The regulatory model should mirror Fedwire or SWIFT governance—overseeing operational risk, liquidity, and interoperability—not the Howey Test. This is a payments system war the SEC is destined to lose.
99%
Txn are Utility
10,000+ TPS
System Scale
04
The Real Winner: On-Chain Dollar Hegemony
While regulators bicker, Circle's USDC and Tether's USDT are becoming the global reserve currencies for decentralized finance. The true policy failure is ceding control of the world's digital dollar pipeline to offshore entities and opaque governance. The race is for the ledger, not the legal definition.
50+
Chains Deployed
$1.2T+
Monthly Volume
thesis-statement
THE REGULATORY MISMATCH
The Core Argument: It's Money, Stupid
The CFTC vs. SEC debate is a legal sideshow that ignores the functional reality of stablecoins as programmable money.
Stablecoins are money instruments, not securities or commodities. Their primary function is settlement and value transfer, not investment return. The SEC's Howey Test and CFTC's commodity frameworks are irrelevant for assets designed as digital cash.
Regulatory categories create friction where none should exist. A tokenized dollar on Ethereum or Solana must move as freely as a wire between JPMorgan and Citi. Treating it as a security creates artificial settlement layers that destroy its utility.
The market already decided. Tether (USDT) and Circle (USDC) process more daily volume than most payment networks. Their adoption in DeFi protocols like Aave and Uniswap is for liquidity, not speculation. Regulators are fighting the last war.
market-context
THE REALITY
The Stakes: A $160B Shadow Payment System
The stablecoin debate is not about securities law; it is about the de facto global payment rail that has already been built.
The $160B Shadow System exists outside traditional banking. Regulators debate securities classification while Tether's USDT and Circle's USDC settle more daily volume than Visa. This is a parallel financial infrastructure operating at internet speed.
The SEC vs. CFTC debate is a jurisdictional sideshow. The core issue is monetary sovereignty and control. Stablecoins are the settlement layer for DeFi protocols like Aave and Uniswap, not passive investment contracts.
The technical architecture is the policy. Programmable dollars on chains like Ethereum and Solana enable automated, cross-border value transfer that legacy systems cannot replicate. The debate misses the operational reality.
Evidence: USDC processed over $12T in on-chain settlement volume in 2023. This dwarfs the transactional use case of any traditional security and defines its primary utility.
STABLECOIN CLASSIFICATION
The Regulatory Mismatch: Security Framework vs. Money Reality
Comparing how US regulatory frameworks misapply to stablecoins, which function as digital money, not securities or commodities.
| Regulatory Lens | SEC (Security) | CFTC (Commodity) | Money Reality (Functional) |
|---|---|---|---|
Primary Legal Test Applied | Howey Test (Investment Contract) | Commodity Exchange Act (CEA) | Economic Function & Use |
Defining Characteristic | Expectation of profit from others' efforts | Underlying asset is a 'good' (e.g., wheat, gold) | Medium of exchange, unit of account, store of value |
Applies to Fiat-Backed (e.g., USDC, USDT) | |||
Applies to Algorithmic (e.g., DAI, FRAX) | |||
Applies to Yield-Bearing (e.g., sDAI, USDY) | |||
Settlement Finality Recognition | Not a consideration | Not a consideration | Core requirement (< 5 seconds) |
Primary Regulatory Goal | Investor protection / disclosure | Market integrity / anti-manipulation | Financial stability / payment system integrity |
Resulting Regulatory Gap | Forced into ill-fitting disclosure regime | Treated as a speculative derivative | No dedicated federal framework for payment stablecoins |
deep-dive
THE REGULATORY MISMATCH
The Path Forward: A Bespoke Regime for Digital Money
The CFTC vs. SEC jurisdictional debate is a legacy framework failing to address the core technical and economic function of stablecoins.
The debate is a category error. Regulators argue over whether a stablecoin is a security or commodity, but its primary function is a settlement and payment rail. This is like arguing whether a Visa network cable is a stock or a pork belly.
Stablecoins are monetary infrastructure. Their value stems from network effects and utility, not profit-sharing expectations. A token like USDC is a digital bearer instrument for final settlement, more akin to a narrow bank or a Fedwire payment than an investment contract.
The real risk is systemic, not investor protection. The failure of a major algorithmic or undercollateralized stablecoin (e.g., Terra's UST) poses contagion risk to DeFi lending protocols like Aave and Compound, not just retail bagholders. This is a payments system stability issue.
Evidence: The 2022 UST collapse triggered a $40B+ destruction of market value and cascading liquidations across interconnected DeFi protocols, demonstrating that the critical failure mode is financial stability, not securities fraud.
risk-analysis
BEYOND REGULATORY THEATER
The Real Risks We're Ignoring
The CFTC vs. SEC jurisdictional fight is a political sideshow that distracts from the systemic, technical, and monetary risks embedded in stablecoin design.
01
The Real Systemic Risk: Off-Chain Reserve Opacity
The debate fixates on 'security' vs. 'commodity' while ignoring the black box of off-chain collateral. Most fiat-backed stablecoins rely on opaque, unauditable bank accounts and commercial paper. The failure mode isn't a hack; it's a TradFi bank run where on-chain redemption requests exceed liquid reserves.
- Tether's $100B+ reserves are only attested quarterly, not audited in real-time.
- Circle's USDC is subject to traditional banking hours and regulatory seizure risk.
- True systemic contagion occurs when a reserve failure breaks the 1:1 peg, cascading through DeFi protocols like Aave and Compound.
$100B+
Opaque Reserves
~90 Days
Audit Latency
02
The Technical Failure: Oracle Manipulation & DeFi Contagion
Stablecoins are the foundational collateral layer for DeFi. Their peg integrity is secured by price oracles like Chainlink, not just issuer promises. A sophisticated attack targeting oracle feeds can trigger mass, automated liquidations across the ecosystem.
- The $100M+ Mango Markets exploit demonstrated oracle manipulation to drain a solana-based stablecoin pool.
- Liquity's LUSD and Maker's DAI are vulnerable to coordinated attacks on ETH/stablecoin price feeds.
- This creates a reflexive death spiral: oracle failure → depeg → protocol insolvency → further depeg.
$100M+
Exploit Vector
~3s
Oracle Latency Risk
03
The Monetary Policy Risk: De Facto Digital Dollarization
The SEC/CFTC debate assumes a domestic US framework, but USDT and USDC are global shadow currencies. Their adoption represents a de facto export of US monetary policy, creating massive unaddressed geopolitical and financial stability risks.
- ~70% of crypto trading volume is paired against Tether's USDT, making it the primary global on/off-ramp.
- Foreign nations face dollarization: Countries with weak currencies see citizens adopt USDC, undermining local monetary sovereignty.
- The real regulator is the US Treasury's OFAC, which can sanction wallet addresses, effectively freezing digital dollar access globally.
~70%
Trading Pairs
Global
Policy Impact
04
The Solution: On-Chain Verification & Algorithmic Backstops
Mitigating these risks requires moving beyond fiat IOUs. The path forward is proof-of-reserves on public chains and algorithmic stabilization that reduces centralized failure points.
- MakerDAO's RWA vaults are exploring on-chain attestations for treasury bills via protocols like Centrifuge.
- Frax Finance's hybrid model combines collateral with an algorithmic (Frax) component to absorb peg stress.
- Layer 2 native stablecoins like Ethena's USDe use delta-neutral derivatives on-chain to create a crypto-native, scalable stable asset.
24/7
On-Chain Proof
Delta-Neutral
New Model
counter-argument
THE REGULATORY MISMATCH
Steelman: "But Some Stablecoins *Are* Securities"
The CFTC vs. SEC jurisdictional fight ignores the core technical function of stablecoins as programmable money, not investment contracts.
The legal classification debate is a distraction from the technical reality of stablecoins. Tokens like USDC and DAI are not held for profit from a common enterprise; they are programmable settlement assets for DeFi protocols like Aave and Uniswap.
Securities law evaluates profit expectation, but a stablecoin's primary utility is censorship-resistant transaction finality. The value accrues to the underlying protocol's activity, not the token issuer, similar to how TCP/IP's value accrues to the internet, not its creators.
The real regulatory target should be the issuer's reserve management and redemption, not the token's secondary market status. The SEC's Howey Test application fails for purely transactional assets, a precedent set by the CFTC's classification of Bitcoin and Ether as commodities.
Evidence: The $130B stablecoin market processes more daily transaction volume than Visa. This scale demonstrates its role as infrastructure, not a security, with on-chain data from Dune Analytics showing >90% of stablecoin volume is for payments and collateral, not speculation.
FREQUENTLY ASKED QUESTIONS
Frequently Challenged Questions
Common questions about why the CFTC vs. SEC debate misses the point of stablecoins.
The CFTC vs. SEC debate over 'security' or 'commodity' classification is a legal distraction from the core technological function. Stablecoins like USDC and DAI are primarily payment rails and settlement layers. The real question is their operational resilience, not which legacy agency gets jurisdiction over their price discovery.
takeaways
STABLECOIN REALITY CHECK
TL;DR: The Builder's Checklist
Regulatory theater distracts from the core technical and economic requirements for a stablecoin to survive.
01
The Problem: Regulatory Theater
The CFTC vs. SEC debate is a jurisdictional turf war over a symptom. It ignores the systemic risk of fragmented liquidity and oracle failure, which are the real points of failure.\n- Real Risk: A $10B+ stablecoin failing due to a price feed exploit, not a lawsuit.\n- Builder Focus: Design for regulatory arbitrage and sovereign-grade resilience, not just one agency's approval.
0
Major Failures from Lawsuits
5+
Major Oracle Exploits
02
The Solution: Over-Collateralized & Verifiable
Follow the MakerDAO (DAI) and Liquity (LUSD) blueprint. Asset-backing must be transparent, excessive (>100%), and on-chain. This solves the 'security' debate by making it irrelevant.\n- Key Benefit: Eliminates counterparty risk that plagues fiat-backed models like USDC.\n- Key Benefit: Creates a native yield engine via Ethena's sUSDe model, turning stability into a product feature.
>150%
Typical Collateral Ratio
$10B+
DAI TVL
03
The Problem: The Fiat Gateway Illusion
Stablecoins pegged to a central bank's monetary policy are a dead end for DeFi. They import inflation and censorship. The SEC/CFTC fight assumes this is the only model.\n- Real Risk: Your stablecoin's value is tied to the Fed's balance sheet and OFAC's whitelist.\n- Builder Focus: Neutral reserve assets (e.g., LSTs, BTC) and algorithmic stability are the only paths to credible neutrality.
100%
OFAC-Compliant (USDC)
$3.3T
Fed Balance Sheet Risk
04
The Solution: Intent-Based Settlement Layer
Treat stablecoins not as bank deposits, but as the ultimate settlement asset within a generalized intent framework like UniswapX or CowSwap. This bypasses bridge risks and liquidity fragmentation.\n- Key Benefit: Enables cross-chain atomic swaps without wrapped asset risk.\n- Key Benefit: Across Protocol and LayerZero demonstrate the demand for this primitive; a native stablecoin is its logical endpoint.
~5s
Optimistic Settlement
-90%
Bridge Risk
05
The Problem: Misaligned Incentive Structures
Fiat-backed stablecoins (USDT, USDC) profit from float and traditional finance spreads. This creates a fundamental conflict with DeFi's permissionless, open-source ethos. Regulators are debating the wrong profit model.\n- Real Risk: The entity maximizing its TradFi profit is the same one guaranteeing your 'stable' asset.\n- Builder Focus: Protocol-owned liquidity and fee distribution to holders (e.g., Frax Finance) align the stablecoin with its users.
Billions
Annual Float Revenue
0%
User Revenue Share (Legacy)
06
The Solution: Hyperliquid Money Legos
Build stablecoins as composable yield-bearing base layers. Think EigenLayer restaking for stablecoins—where collateral simultaneously secures the chain and backs the asset. This creates an unbreakable network effect.\n- Key Benefit: Native yield defends the peg by attracting organic demand, not regulatory fiat.\n- Key Benefit: Turns every integrated app (AAVE, Compound) into a liquidity sink and stability mechanism.
5-10%
Native APY
100+
Integrated Protocols
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall