stablecoin arrangements

The report addresses the market risks and regulatory challenges presented by stablecoins and urges Congress to act quickly.

By Alan W. Avery, Yvette D. Valdez, Stephen P. Wink, Pia Naib, and Deric Behar

On November 1, 2021, the President’s Working Group on Financial Markets (PWG) in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) published its long-anticipated Report on Stablecoins (the Report). Regulators worldwide have become acutely aware of how stablecoins function as a bridge between traditional financial markets and digital asset markets. As a result, regulators are seeking to address the risks, opportunities, and regulatory gaps presented by this burgeoning asset class.

The Report first describes how payment stablecoins function, before identifying key gaps in prudential authority over stablecoins in the US financial system. It then presents recommendations for addressing those gaps.

The global central bank cooperative body envisions stablecoins within the context of international standards for payment, clearing, and settlement systems.

By Alan W. Avery, Stuart Davis, Simon Hawkins, Stephen P. Wink, Pia Naib, and Deric Behar

Among the different types of digital assets, global authorities seem most focused on stablecoins.

This concern is the result of a few factors:

–Stablecoin use has ballooned in a very short time, going from less than US$3 billion in market capitalization at the beginning of 2019 to approximately US$130 billion as of October 2021.

–Stablecoins are intimately connected with the financial system because they function as an intermediary between traditional markets and cryptoasset markets.

–Stablecoin arrangements are in many cases opaque regarding the nature of the asset reserves underlying their currency peg.

–Stablecoins remain mostly unregulated.

Understanding and containing the systemic risks in this burgeoning asset class is therefore a top priority for regulators worldwide.

An ambitious proposal could bring digital assets into the mainstream regulatory fold.

By Yvette D. Valdez, Stephen P. Wink, Adam Bruce Fovent, Adam Zuckerman, and Deric Behar

During an eventful summer for the digital assets industry, it may have been easy to miss US Representative Don Beyer’s introduction of the Digital Asset Market Structure and Investor Protection Act (the Bill) on July 28, 2021. The Bill is perhaps the most promising effort to date by Congress to enact legislation that would address some of the legal ambiguities for digital assets and better define their place within existing financial regulatory structures.

Rep. Beyer described the current legal landscape for digital assets as “ambiguous and dangerous for investors and consumers.” Broadly, the Bill seeks to address deficiencies and/or ambiguities relating to consumer protection, trade reporting and transparency, and anti-money laundering / know your client (AML/KYC) procedures for digital assets.

The Bill also seeks to address a wide range of practical issues, from the fundamental (such as defining industry terms and categorizing cryptoassets) to the more nuanced (such as establishing standards for transaction reporting and consumer protection and advisories).

Gary Gensler asserts the SEC’s broad powers over digital assets, and puts consumer protection at the forefront.

By Stephen P. Wink, Adam Zuckerman, and Deric Behar

On August 3, 2021, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), gave a speech on the digital asset industry. The speech offered some indication of what he expects the SEC to focus on in this area but did not provide concrete guidance for industry participants looking for clarity on regulatory uncertainties. He did, however, make clear that he believes “we just don’t have enough investor protection in crypto” and that the SEC will play a more active role in regulating the industry.

As the market for NFTs heats up, market participants should remain mindful of the regulatory implications of complex schemes.

By Stephen P. Wink, Miles P. Jennings, Shaun Musuka, and Deric Behar

As the current crypto boom has progressed, it seemed Decentralized Finance (DeFi) had cemented its position as the dominant new narrative of this cycle. This view is supported by the tens of billions of dollars that have flowed into DeFi protocols over the past 12 months. Yet amid renewed public interest, non-fungible tokens (NFTs) show signs that they should not be overlooked in discussions regarding the hottest new developments in the crypto space. As with any fast-moving market driven by explosive consumer interest and waves of money, regulators will likely take an interest and scrutinize market practices against existing regulations.

Regulators once again offered piecemeal guidance, while focusing on risks and enforcement. Meanwhile, innovation and institutional adoption took off.

By Stephen P. Wink, Todd Beauchamp, Yvette D. Valdez, Eric S. Volkman, Adam Bruce Fovent, and Deric Behar

Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that remains without a comprehensive regulatory framework in the US.

The no-action letter is the first to expressly permit token transfer off-platform to non-users and conversion to fiat currency by token holders.

By Stephen P. Wink, Shaun Musuka, and Deric Behar

As crypto prices surge, we find ourselves in the midst of another crypto wave. Given the unrelenting flow of news that accompanies such periods, it may have been easy to miss that the SEC staff recently granted no-action relief to another Ethereum-based token, VCOIN.

In only its third no-action letter to date for digital tokens, the SEC cleared the way for the software development company IMVU, Inc. to sell VCOIN, an ERC-20 token, as a transferable non-security to its global platform users. In its incoming letter, IMVU stated that it operates “one of the largest online three-dimensional avatar-based social communities in the world” with “over 7 million monthly active users from more than 140 countries” and “a user-generated virtual goods catalog of more than 40 million items.” In the same letter, IMVU sought guidance from the SEC as to whether its offering of VCOIN would require registration under Section 5 of the Securities Act and Section 12(g) of the Exchange Act.

A new report explores the advantages, impacts, and approaches the Eurosystem is considering as it contemplates a digital currency.

By Max von Cube

In October 2020, the European Central Bank (ECB) published a Report on a Digital Euro (the Report). The Report sets out the main findings of a task force initiated in early 2020 to investigate the potential for a central bank digital currency (CBDC) in the euro area.

The proposed regulation will provide greater consumer and investor protection and lessen the risks of participating in digital finance.

By Stuart Davis

The EU Commission has published a proposal for a wide-ranging EU regulation covering cryptoassets and e-money tokens, both of which are currently largely unaddressed in EU financial services legislation.

The draft Markets in Cryptoassets Regulation (MiCA) has been designed to:

  • Increase legal certainty in the area of cryptoassets
  • Support innovation and promote the development of cryptoassets and the wider use of distributed ledger technology (DLT)
  • Instil appropriate levels of consumer and investor protection and market integrity in an area that presents many of the same risks as traditional financial instruments
  • Ensure financial stability

The US OCC allows banks, with certain restrictions, to hold assets in reserve for stablecoin issuers.

By Alan W. Avery, Todd Beauchamp, Stephen P. Wink, Pia Naib, Loyal T. Horsley, Charles Weinstein, and Deric Behar

On September 21, 2020, the US Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1172 (the Letter), giving national banks and federal savings associations (FSAs) the greenlight to hold deposits that serve as reserves for the underlying assets backing certain “stablecoins” on behalf of customers. According to the Letter, national banks and FSAs are granted this expanded authority to hold stablecoin reserves if all of the following conditions are met:

  • Deposits that constitute reserves for stablecoins are limited to stablecoin transactions involving hosted wallets.
  • The stablecoins are backed by a single fiat currency.
  • The stablecoins are redeemable by the holder on a one-to-one basis upon submission of a redemption request to the issuer.