I. What are stablecoins?
Stablecoins are a subset of crypto-assets, which vary greatly in design, but whose purpose is to maintain stable value, by reference to other assets. There are two major subsets of stablecoins, “backed stablecoins” and “algorithmic stablecoins”. Collateralized stablecoins are designed backed by reserve assets, such as dollars, gold, or a basket of commodities. Algorithmic stablecoins do not seek to stabilize their value through underlying collateral. Instead, algorithms are used to pre-program the supply of the token based on demand, thereby stabilizing the price. Currently, stablecoins are often used to facilitate transactions on crypto exchanges, reducing the fees associated with transferring other cryptocurrencies to fiat. They are also considered to have potential for improving efficiency and reducing costs of cross-border transactions.
ii. Regulation: the status quo
In many developed economies, there is little structured regulation of stablecoins. Naturally, there are those who argue that regulators should not intervene. Stablecoins use similar technology to that underpinning Bitcoin, which sought to establish an electronic money system, using a distributed ledger to avoid the need for a centralized network administrator. This has led some to claim that Bitcoin could be the first “self-regulating currencywhich represented a transfer of power from the sovereign state to the individual. Those who view Bitcoin and its successors from such a perspective might argue that state-imposed regulation is an attempt by the state to impose its authority over an aspect of the financial system, over which it has had no control. these last years. Less philosophically, some argue that since the primary users of stablecoins are risk-aware crypto traders, regulation is not warranted. Additionally, given that the evolution of stablecoins is still in its infancy, one could argue that regulation risks stifling innovation. Finally, regulatory requirements risk creating barriers to entry for new market entrants.
However, policymakers in the EU, US and UK consider the status quo no longer acceptable. Specifically, concerns have arisen regarding consumer protection (by way of example only, with respect to redemption rights), financial stability risks (in circumstances where the market capitalization of stablecoins is broadly similar to that of all companies listed in Poland and growing rapidly) and the lack of oversight by regulators of reserve assets (in the case of collateralized stablecoins). Therefore, while the EU is further along in terms of the timetable for the enactment of the legislation, given that in March 2022 of this year the European Parliament adopted its negotiating position on the draft regulation on the markets crypto assets (“MICA”), outlines have also emerged in the United States and the United Kingdom in recent months, demonstrating a diversity of approach.
iii. Different approaches: EU, US and UK
MICA specifically targets stablecoins, which are categorized as “tokens referenced by assets“, who “claim to maintain stable value by referring to the value of multiple legal tender fiat currencies, one or more commodities, or one or more crypto-assets” [Article 3(1)(3)] or “e-money tokenswhich seek to maintain stability by referring to a single fiat currency. As for algorithmic stablecoins, recital 26 provides that they should not be considered as “asset-referenced tokens”, “provided that they do not aim to stabilize their value by referencing one or more other assets”.
The MICA requires that in order to provide crypto-asset services across Europe, legal persons are required to obtain authorization from a competent national authority. The process of obtaining authorization requires compliance with strict requirements, such as capital requirements, ICT security obligations, consumer protection obligations, maintaining policies on conflicts of interest and many others. Issuers of stablecoins are subject to additional obligations beyond those that apply to simple crypto-asset service providers. By way of example, they will be required to publish a whitepaper, which must contain detailed information on (among other things) the design of the coin, the rights and obligations of the holders, the underlying technology and an explanation of the risks involved. to the transmitter. .
In November 2021, the US Treasury released general recommendations to regulate stablecoin issuers. The report is notable for pushing for immediate action by lawmakers to address the risks believed to be posed by unregulated stablecoins. In particular, the Treasury notes its belief that “legislation is urgently needed to comprehensively address the prudential risks posed by stablecoin payment arrangements” and the “the rapid growth of stablecoins increases the urgency of this work”. Even more striking is the recommendation that stablecoins should only be allowed to be issued by “assured depository institutions,” which refers to “any bank or savings association whose deposits are insured” and that “are appropriately monitored and regulated”. If this proposal were adopted, significant limits could be imposed on entities capable of issuing stablecoins and would mean a similarity of treatment between stablecoin issuers and commercial banks. Some have argued that such an approach is inappropriate, because unlike commercial banks (which create money by lending it), stablecoin issuers do not lend, but accept fiat currency in exchange for digital assets. . However, it remains to be seen whether this approach will be adopted by lawmakers.
Finally, in the UK, which is also behind the EU in terms of legislative timelines, the UK Treasury published in April 2022 extensive proposals for stablecoin regulation. As with MICA, algorithmic stablecoins will be excluded. The thrust of the proposal is to bring stablecoins, when used as a means of payment, into the regulatory perimeter of the FCA and regulate them in a manner broadly equivalent to that of e-money providers. This would impose safeguard rules designed to protect the funds in the event of the issuer’s insolvency, such as the requirement that reserve assets be held in an account separate from the issuer’s working capital, be invested in high quality liquid assets or covered by an insurance policy. Specifically, HM Treasury seeks to ensure that each £1 token issued will be protected with £1 in reserve and the reserve funds cannot be used for any other purpose. In addition, Part 5 of the Banking Act 2009 will be extended to apply to stablecoin-related activities that are deemed to pose systemic financial risk.
So there is a clear trend to regulate stablecoins. It will be interesting to examine whether (and under what conditions) legislators maintain the approaches currently proposed. Additionally, the different regulatory approaches are also likely to impact the market for stablecoin issuers in all jurisdictions.