DFC

Regulatory guidance and oversight are topics that regularly intrude in the stablecoin market and are sure to shape the future of the ecosystem. Last week, the European Council voted in favor of the EU’s Markets in Crypto Assets (MiCA) legislation, set to come into force in 2024, to provide greater transparency and accountability to individuals and businesses operating in the crypto industry with stablecoins given special treatment. In particular, the new rules forbid the collection of interest by investors on stablecoins, which could provide motivation for securitization of tokenized retail money-market funds or commercial bank deposits, which do not fall under MiCA and are free to pay interest.

“JP Morgan already enables tokenized U.S. dollar deposits with JPM Coin. Now it plans to enable blockchain-based Euro deposits ‘soon’… Most blockchain financial applications sit under JP Morgan’s Onyx division. This includes Onyx Digital Assets with an intraday DLT repo application, Liink for messaging around conventional payments and JPM Coin. It’s also experimenting with using JPM Coin on a public blockchain as part of Project Guardian, its Singapore DeFi experiments with the Monetary Authority of Singapore.”

Silvergate Capital no longer plans to launch its own payments-focused, dollar-pegged stablecoin this year. Company executives said the delay is related to regulatory compliance, not technical issues, underscoring that the technology was ready when Silvergate acquired it from Diem.

Coinbase says the adoption of USD Coin has been “more conservative” outside of the United States, which it believes is a result of international currency conversion fees. The U.S. exchange said there is currently three times more USDC bought with U.S. dollars as compared to other currencies. The exchange said it is aiming to “build more on-ramps for users to access USDC,” and will be waiving fees for all customers who buy or sell USDC using any fiat currency.

The World Economic Forum’s (WEF's) Digital Currency Governance Consortium has published a summary of the earlier-published comprehensive analysis of the macroeconomic impact of cryptocurrency and stablecoins. The project had two objectives: (i) to project economic outcomes of crypto and stablecoins given various possible high-level regulatory paths and (ii) to arm policymakers and business leaders with the projections to inform decision-making. The rising concern around the potential spillover effects of crypto and stablecoins on the financial system was another impetus.

US Fed Vice Chair for Supervision Michael Barr shot across the bow of any bank plans to issue dollar-denominated stablecoins on open permissionless distributed ledger technology (DLT) networks. "It remains an open question whether banks can engage in such arrangements in a manner consistent with safe and sound banking and in compliance with relevant law... [Banks] may not be able to track who is holding their tokenized liabilities, or whether they are being used in risky or illegal activity.

"Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming said he likely would not dismiss the lawsuit Custodia Bank filed against the [Fed] earlier this year. Following oral arguments from all parties, Skavdahl declined to issue a ruling from the bench on the Fed's motion to dismiss the lawsuit. He noted that the scope of the suit might be adjusted but the matter would likely survive "in some form." Custodia, a Wyoming-chartered special-purpose depository, sued the Fed in June, hoping to compel it to make a decision on the company's roughly two-year-old application for a master account with the Kansas City Fed."

"This paper discusses a decentralized finance (DeFi) application called MakerDAO. The Maker Protocol, built on the Ethereum blockchain, enables users to create and hold currency. Current elements of the Maker Protocol are the Dai stable coin, Maker Vaults, and Voting. MakerDAO governs the Maker Protocol by deciding on key parameters (e.g., stability fees, collateral types and rates, etc.) through the voting power of Maker (MKR) holders. The Maker Protocol is one of the largest decentralized applications (DApps) on the Ethereum blockchain and is the first decentralized finance (DeFi) application to earn significant adoption. The objective of this paper is to analyze and discuss the significance, uses, and functions of this DeFi application."

"European Union (EU) lawmakers [reportedly] won’t vote on the Markets in Crypto Assets regulation (MiCA) until February, likely meaning further delays in the landmark licensing regime for crypto companies within the bloc. A previous tentative plan for the parliament to vote at its December plenary session has been abandoned given the length and complexity of the text. EU procedures require legal acts such as MiCA, which was negotiated in English, to be available in all the bloc's 24 official languages."

"Asked about Coinbase’s claim that traders are moving ‘offshore’ to exchanges like Binance that have rolled out zero-fee BTC transactions, chief operating officer Emilie Choi clarified that “companies that say zero fee are still generating a spread” and Coinbase was “not going to compete on price because of the premium nature of our offering.” Exchanges based in less, er, rigorous regulatory climates also get to offer products that Coinbase can’t legally provide. Armstrong said he repeatedly told policy makers that “by pushing so hard on local companies, you’re not actually protecting investors. You’re just encouraging them to move offshore to even less regulated options, right?”"

Significant market volatility this week induced by the collapse of the FTX exchange has impacted stablecoins with many of them depegging temporarily. Tether's USDT temporarily declined to $0.97 on November 10 as redemptions reportedly surpassed $600 million over the previous two days. Circle’s USDC fell to $0.977 very briefly. Both rapidly regained their pegs. Yesterday I reported that USDT had spiked down and USDC spiked up, but different sources tell different stories. Yesterday's USDC graphic sourced CoinMarketCap.com whereas CoinGecko.com tells a different story (see below). with USDC also spiking down like USDT did. In any case, lots of volatility!

In June 2022 the New York Department of Financial Services (NYDFS) issued formal guidance for NYDFS-approved stablecoin issuers, including upgrades to the amount and quality of information that issuers must provide to the public.

"The Regulated Liability Network (RLN) is a contribution to the global debate on the future of money offered by a group of industry participants. It explores the technical, legal and business characteristics necessary to provide on-chain, 24*7 programmable, final settlement in sovereign currencies, consisting of the liabilities of both public and private regulated financial institutions. These activities could enable a more functionally rich financial system that is compliant with all existing laws and regulations."

The Hong Kong Monetary Authority (HKMA) published a paper on volatility spillover from asset-backed stablecoins to money market instruments, focusing on Tether. Stablecoins bear liquidity mismatch risks similar to money market funds, which may expose them to a fire-sale of reserve assets in times of crypto ecosystem instability and in turn increase the volatility of these reserve assets. It finds that, in extreme circumstances, these fire-sales could have material impacts on the traditional financial system such as the money market. The paper proposes regulations that require stablecoin issuers to provide standardized and regular disclosures of their reserve assets holdings, and possibly imposing restrictions on the composition of reserve assets and requiring well- defined redemption rights

The Clearing House (TCH) published a paper that analyzes US insured depository institutions legal authority to issue stablecoins and engage in stablecoin-related activities. It finds that, in 2020 and 2021, Office of the Comptroller of the Currency (OCC) gave national banks the clear legal authority to issue and exchange stablecoins, based on language in the National Bank Act, and consistent with numerous legal decisions and regulatory determinations regarding a bank’s authority to issue payments and deposit instruments. National banks have always been permitted to develop innovative deposit and payment mechanisms, as receiving deposits and acting as financial intermediaries are core functions of banks.

US Law firm Davis Wright Tremaine LLP (DWT) published a report on Wyoming's Custodia Bank's successful complaint regarding the Federal Reserve's tardy response to the bank's application for a Master Account. DWT represented Custodia in the legal action, and they believe We believe this is the first case in which claims seeking to compel the grant of a master account have proceeded beyond the motion to dismiss stage. I reported on this some weeks ago but with little of the detail included here. I am quite surprised at the crypto press hasn't picked up on this important news, but I guess they prefer their stories spoon fed to them.

The Bank of Canada [BoC] published a paper on the risks stablecoins could pose to the financial system. It argues that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader crypto-asset markets and the traditional financial sector. It also argues that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance (DeFi). Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, it explores the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy.

USD Coin (USDC) stablecoin issuer Circle has announced the mutual termination of its proposed merger with special purpose acquisition company (SPAC) Concord Acquisition. The deal was announced in July 2021 with a preliminary valuation of $4.5 billion and was then amended in February 2022 when Circle's valuation ballooned to $9 billion. USDC is currently the 2nd largest stablecoin in circulation, with a market cap of $43 billion.

Fnality and HQLAX demonstrated together with Banco Santander, Goldman Sachs and UBS, the first cross-chain repo swap pilot across Corda and Enterprise Ethereum, paving the way for the settlement of intraday transactions. This is part of Fnality’s mission to provide its participants with a single pool of liquidity to facilitate payments (P), cross-currency payments (PvP) and delivery versus payment (DvP) use cases. This pilot also proves interoperability across the Fnality Payment System and HQLAX’s Digital Collateral Registry, bridging Corda and Enterprise Ethereum. Fnality was founded to create a network of decentralised financial market Infrastructures (dFMIs) to deliver the means of payment-on-chain in wholesale banking markets, based on wholesale stablecoins backed by central bank reserves. The HQLAᵡ operating model leverages distributed ledger technology to enable atomic delivery verses delivery (DvD) for baskets of securities residing at multiple custodians.

"Tether Operations Limited (Tether), the company operating the blockchain-enabled platform tether.to that powers the first and most widely used stablecoin by market capitalization announced today the addition of its offshore Chinese Yuan (CNH₮) to the Tron blockchain. At launch, Bitfinex will be the first exchange to enable its users to deposit and withdraw CNH₮ using the Tron blockchain transport layer from the platform. "

"Contrary to what the Barclays note says, placing funds on deposit at the Fed through the ON RRP facility would not make USDC a "closer substitute for insured bank deposits". Since ON RRP deposits are not liquid, it would actually make it less like an insured bank deposit, since it would not be possible to redeem it overnight. "

"Tron's Decentralized USDD algorithmic stablecoin slipped further from parity with the US dollar today. USDD dropped to slightly below 0.97 before recovering to around $0.98. This marks the second time the stablecoin has slipped out of dollar parity since it was first founded earlier this year. In June, the stablecoin dipped all the way to $0.96 before bouncing back to its intended value."

The Canadian Securities Administrators (CSA) is strengthening its approach to oversight of crypto trading platforms by expanding existing requirements for platforms operating in Canada. Also, the CSA announced that it is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives. In that context, crypto trading platforms that are registered or that have entered into a pre-registration undertaking are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative. Crypto trading platforms are expected to have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative.

Tether has pledged to stop the practice of lending out funds from the reserves that back its USDT stablecoin. The move is likely in response to a Wall Street Journal report earlier this month alleging these loans were risky, claiming that the “company may not have enough liquid assets to pay redemptions in a crisis,” even though Tether claims that the loans are over-collateralized and covered by “extremely liquid assets." Tether said that starting from now, throughout 2023, it will reduce secured loans in its reserves to zero.

"I’ve been asked at least 5+ times today what is going on with BUSD, why USDC withdrawals were halted, what wrapped/pegged/bridged BUSD is, why [insert stablecoin here] is going to zero, and other increasingly hysterical questions."