Two Steps Forward for Broker-Dealers Holding Payment Stablecoins

SEC Staff Publishes 2% Net Capital Haircut Requirement for Payment Stablecoins

The staff (the “Staff”) of the SEC’s Division of Trading and Markets has clarified that broker-dealers can treat a “proprietary position in payment stablecoin as having a ‘ready market’ under Rule 15c3-1 [under the Exchange Act].”¹ Accordingly, the Staff’s position permits a broker-dealer to take a 2% haircut of the “market value of the greater of the long or short proprietary position in payment stablecoin in calculating its net capital.”² The Staff’s position is likely to accelerate the adoption of payment stablecoins by broker-dealers, particularly broker-dealers transacting in crypto assets.

Background: The Net Capital Rule and the Staff’s FAQ

Rule 15c3-1 (the “Net Capital Rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”) requires each broker-dealer to maintain sufficient liquid assets in excess of its liabilities, to satisfy customer and creditor claims in the event of the broker-dealer’s failure. ³ The Net Capital Rule requires a broker-dealer to first calculate its net worth (i.e., its assets minus its liabilities) and then make certain positive and negative adjustments to its net worth. These negative adjustments require the broker-dealer to deduct illiquid and unsecured assets and reduce the value of certain assets through “haircuts”⁴ to arrive at its “net capital,” i.e., the current liquidity status of the broker-dealer.

The FAQ is a significant step forward for broker-dealers that hold, or seek to hold, payment stablecoins. As SEC Commissioner Hester M. Peirce notes in a statement released on the same day as the FAQ, some broker-dealers had historically applied a 100% haircut as a matter of caution to proprietary positions in payment stablecoins — i.e., for such firms, a proprietary position in payment stablecoins had not historically counted towards their net capital at all.⁵ Following the FAQ, if, for example, a broker-dealer holds a proprietary position of $100 in “payment stablecoins,” this position will count for $98 towards the broker-dealer’s net capital instead of $0 for broker-dealers that historically applied a 100% haircut.

Notably, the FAQ places payment stablecoins in a comparable position with other liquid assets that are often treated as “near-cash” or as “cash equivalents.” For example, the Net Capital Rule subjects U.S. Treasury bonds to a haircut that ranges from 0% (for Treasuries with less than three months to maturity) to 6% (for Treasuries with 25 or more years to maturity).⁶ For money market funds registered under the Investment Company Act of 1940, the haircut is typically 2% of the market value of the greater of the long or short position held by the broker-dealer in such funds.⁷ Following the FAQ, broker-dealers that seek to hold payment stablecoins as a proprietary asset will not necessarily be at a disadvantage to broker-dealers who seek to maintain proprietary positions in other traditional near-cash assets.

A Few Further Notes

While the FAQ will be undoubtedly welcomed by many broker-dealers and the crypto industry in general, a few further notes may be important to bear in mind.

First, the Staff has expressly clarified that the 2% haircut is limited to only “payment stablecoins.” While the recently passed GENIUS Act enacts a federal framework for payment stablecoin regulation,⁸ rulemaking under that Act has only recently begun. A core feature of a payment stablecoin under the GENIUS Act is its primary use case: a means of payment or settlement rather than investment. Importantly, payment stablecoins will not include so-called “algorithmic” stablecoins. Accordingly, prior to the effective date of the GENIUS Act (the earlier of January 18, 2027, or 120 days after the date on which the federal banking regulators issue implementing regulations under the Act), a “payment stablecoin”⁹ will only refer to a U.S. dollar denominated stablecoin that:

1. is issued by a state regulated money transmitter, state-regulated trust company, or a national trust bank;
2. maintains certain reserve assets that meet the requirements of the GENIUS Act;
3. publicly discloses the issuer’s redemption policy; and
4. publishes a monthly attestation report prepared by a registered public accounting firm regarding the composition of the reserve assets and whether the fair value of the reserve assets is equal to the amount of stablecoins in circulation.

After the effective date of the GENIUS Act, the FAQ states that a payment stablecoin will refer to a stablecoin that meets the GENIUS Act’s definition of payment stablecoin and is issued by a “permitted payment stablecoin issuer” or a “foreign payment stablecoin issuer” that complies with the GENIUS Act’s requirements applicable to such issuers. 

It is unclear what the haircut for a stablecoin other than a payment stablecoin would be, but such other stablecoins are unlikely to receive comparably favorable net capital treatment.

Second, unlike proprietary positions in certain types of equity securities, the FAQ applies the 2% haircut to the greater of the long or short position in a payment stablecoin, with no netting. For example, a broker-dealer holding a long and short position in the same payment stablecoin would only apply the haircut to the greater of these two positions, not to the net value.

The FAQ is undoubtedly a major step forward for payment stablecoin adoption. However, as Commissioner Peirce notes, the FAQ represents informal guidance, although her statement encouraged a formal amendment to the Net Capital Rule to be proposed and adopted at a future date. Market participants who seek to expand or otherwise modify the content of the FAQ in formal rulemaking should consider engaging with the SEC in that process.