Shadow Investment Companies

Abstract

Stablecoins are cryptocurrencies designed to track the value of fiat currency, most commonly the U.S. dollar. Over the past decade, they have grown from a niche innovation into the primary gateway between crypto markets and the traditional financial system, with daily trading volumes exceeding $100 billion. Despite their scale and centrality, stablecoin issuers occupy an uncertain and increasingly contested regulatory space.

This Article argues that the largest stablecoin issuers—such as Circle and Tether—are best understood not as banks or payments firms, but as investment companies under the Investment Company Act of 1940. As a matter of statutory interpretation, these firms satisfy the Act’s definition: they issue redeemable claims, invest customer funds primarily in securities, and derive a substantial portion of their income from those investments. Yet neither issuers nor regulators have acknowledged this status. As a result, stablecoin issuers operate as shadow investment companies, meeting the law’s criteria while evading its constraints.

The Article makes three contributions. First, it provides a systematic application of the Investment Company Act’s primary business and asset-based tests to stablecoin issuers. Second, it shows that this framework applies even if stablecoin tokens themselves are not securities, because issuers independently issue securities and function economically as pooled investment vehicles. Third, it explains why recent legislation, including the GENIUS Act, fails to resolve these issues and may exacerbate regulatory arbitrage. Recognizing stablecoin issuers as investment companies would bring them within the SEC’s existing authority, offering a path toward enhanced transparency and investor protection while also highlighting the limits of fund regulation in addressing systemic risk.