SEC Approves First Yield-Bearing Stablecoin

Between the present market turbulence, memecoin meltdowns, and multi-directional crypto policy positioning efforts, you may have missed the news last week regarding the SEC’s first-ever approval of a yield-bearing stablecoin security, YLDS, issued by Figure Certificate Company.

This post will summarize the path Figure took to achieve the registration and will conclude with a discussion of the benefits and challenges of regulating yield-bearing stables as securities under the ‘33 and ‘40 Acts versus regulating them as a variant of payment stablecoins subject to the pending stablecoin bills.

Nature of the YLDS offering

Issuer Structure

Figure is a face amount certificate (“FAC”) company (“FACco”) registered under the ‘40 Act. If you don’t know what a FACco is, you’re probably not alone since the only FACco most people are likely to have ever heard of (without realizing it is a FACco) is Ameriprise Financial.

Those few lawyers who work on structuring offshore yield-bearing stable offerings, however, are likely to have pondered whether their particular issuer-client could be defensively positioned as an unregistered FACco for mitigating certain risks (Reg M, for example, in the rare case an issuer entertains a concurrent exempt offering in the US). Additionally, despite the tendency of regulators to draw parallels between stablecoin issuers and money market funds, most yield-bearing stablecoins are structured to function more like FACs (i.e. a debt security where the issuer is contractually obligated, whether by expression or implication, to pay a holder a fixed sum in the future) rather than a money market fund, where the stable would be an equity security representing a share of the issuer’s net asset value.

YLDS Structure

There are two classes of yield-bearing securities approved under Figure’s S-1: (i) the Figure Transferrable Certificate (FTC) and (ii) the Figure Installment Certificate (FIC). Both certificates are represented by digital tokens tradeable on the Provenance Blockchain (developed by an affiliate of Figure). The FTC is intended to be a yield—bearing payment stablecoin while the FIC represents a longer-term investment vehicle.

FTC details:

• issued daily at a face amount of $0.01/Certificate.
• may be surrendered (redeemed) at any time at a price equal to the face amount of each Certificate ($0.01), plus accrued interest (minus applicable expenses and fees), rounded to the nearest penny.
• no minimum initial purchase or surrender amount; however, investors will be charged a fee equal to the amount of the automated clearing house (“ACH”) fees on surrenders.
• interest rate is equal to the Secured Overnight Financing Rate (SOFR) less 50 basis points, with a minimum of 0.00%.
• transferable in peer-to-peer and ATS transactions at any time on the Provenance chain. All transferees must be KYC’d and have accounts with Figure. While billed as a permissionless yield-bearing stablecoin, all parties in a peer-to-peer transaction must have whitelisted wallets and issuer accounts.
• matures 20 years from the issue date. Upon maturity, Figure will remit all monies due to the holder and cancel the certificate. The time frame for this transaction will be the ACH settlement date (typically 1-3 days after the transaction date) plus one additional day.

FIC details:

• will be issued periodically beginning in the second year of issuer’s operations at a minimum price of $1,000/Certificate and a maximum price of $1 million/Certificate. F
• holders increase the face amount of a FIC by making additional required annual installment payments equal to 25% of the initial payment. The face amount of each FIC is the aggregate of the initial price and all installment payments per certificate plus any interest added to principal minus any withdrawals.
• interest rate is equal to the overnight SOFR rate (with no discount), with a minimum rate of 0.00%. Simple interest accrues daily and is credited daily to the Certificate holder.
• early surrenders may be subject to penalty.

The Provenance Chain

Figure refers to the Provenance chain as decentralized and permissionless, but notes in its prospectus, “[a]lthough records of peer-to-peer and ATS transactions are viewable on Provenance, record and beneficial ownership of the Figure Transferable Certificates is reflected on the records of the Transfer Agent. The Transfer Agent’s records constitute the official Figure Transferable Certificate holder records and govern the record ownership of Figure Transferable Certificates in all circumstances.” ( original emphasis).

Only those wallets that successfully complete the AML/KYC process through an issuer-affiliate and that are ultimately approved by Figure are eligible to transfer or receive YLDS. Figure further advises that its operation of the chain will not extend to matching orders, brokering transaction or sourcing counter parties.

Why pending stablecoin legislation may provide a better regulatory framework than the Securities Acts (assuming such legislation is extended to cover yield-bearing stables)

• As a FACco, Figure is not subject to more stringent reserve asset requirements relating to credit quality, maturity, diversification and liquidity that would apply to payment stablecoins (or even money market funds) . Specifically, where stablecoin reserves would be limited to cash, short term treasuries and reverse repurchase agreements, Figure’s reserves may include corporate debt, commercial paper, asset-backed securities and certain foreign securities, among other things.
• The pending stablecoin bills would, upon an issuer bankruptcy, give stablecoin holders first priority claims. Holders of YLDS, on the other hand, are merely unsecured creditors.
• While the pending stable bills require 1:1 asset backing, FAC companies are permitted to operate fractional reserves.
• When you couple the three foregoing bullets (a lower reserve ratio, relaxed asset quality requirements, and inferior debt priority for holders), consumers could be at considerably greater risk under the current securities regime than it would be in a banking framework.
• Because of the timing and valuation considerations that apply to reserve requirements for FACs, interest payments are necessarily accrued and remitted monthly, rather than daily (or hourly) as is the case with current unregulated yield-bearing stables utilizing rebasing and related tech.
• YLDS is not truly permissionless in the way regulated stablecoins can be.

Acknowledgement: TEFRA may present conflicting policy challenges to the broad-based, regulated distribution of yield-bearing stables

Depending on how an offering is structured, yield-bearing stables traded in DeFi environments may be considered bearer debt securities. The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) was passed to attack tax avoidance by US Persons. TEFRA included the imposition of penalties on US investors in bearer bonds as well as excise taxes on bearer bond issuers.

Final thought: while my opinion is clear in terms of the Securities Acts being ill- fit for yield-bearing stablecoin regulation, I don’t fault Figure for pursuing its S-1. To the contrary, given there is no good path to registration for this asset-type I commend Figure (and counsel) for staying the course over 2+ years and seeing the registration through.