Stablecoins

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The HKMA’s discussion paper seeks feedback on its proposed regulatory approach to stablecoins, with responses due by 31 March 2022.

By Simon Hawkins and Adrian Fong

On 12 January 2022, the Hong Kong Monetary Authority (HKMA), Hong Kong’s principal regulator for banks and payment systems, published a discussion paper seeking the public’s views on its proposed approach to the regulation of stablecoins (Discussion Paper). The HKMA outlines its views on the development of stablecoins and proposes questions and its initial outlook for establishing an effective regulatory framework for stablecoin activities in Hong Kong.

The Discussion Paper comes three months after the HKMA issued its technical whitepaper on retail central bank digital currency in October 2021, which considers a proposed architecture for issuing e-HKD. These publications, together with recent consultation conclusions from the Financial Services and the Treasury Bureau on implementing a regulatory regime for virtual asset service providers, (see Latham’s blog post), indicate that Hong Kong regulators are moving quickly to create guardrails as financial innovation accelerates.

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.

Andrew Bailey outlined what payments market participants can expect from regulators seeking to address financial stability risk in the world of payments, including as part of the rise and adoption of global stablecoins.

By Brett Carr and Stuart Davis

On 3 September 2020, the Governor of the Bank of England (BoE) Andrew Bailey delivered a speech “Reinventing the Wheel (with more automation)”, in which he outlined regulatory changes that payments market participants can expect, including as part of the global regulatory response to stablecoins.

HM Treasury is planning significant changes to the financial promotion regime, including expanding its scope to certain cryptoassets, and amending the approval process for promotions of unauthorised firms.

By Stuart Davis, Sam Maxson, and Anna Lewis-Martinez

On 20 July 2020, HM Treasury published two consultation papers on a regulatory framework for approval of financial promotions and cryptoasset promotions. The consultations propose to establish a regulatory “gateway” that a firm must pass through before it is able to approve the financial promotions of unauthorised firms, and to bring certain types of cryptoassets into the scope of financial promotions regulations.

Latham fintech lawyers and key industry leaders explore the progress and potential of CBDCs, use cases for stablecoins, and the global regulatory landscape.

Many central banks around the world are currently considering central bank digital currency (CBDC). According to the Bank of International Settlements’ recent survey of 66 central banks, 80% of surveyed central banks are engaged in CBDC work in some capacity, whether that work is conceptual research, experimentation, or pilot projects, and over a third stated that it is “possible” they will issue a retail CBDC within one to six years. Additionally, stablecoins based on Ethereum have surged in use recently, which, along with other large and well-publicized stablecoin projects, has drawn the attention of regulators around the globe.

MAS confirms regulatory approach for derivative contracts on payment tokens.

By Farhana Sharmeen and Marc Jia Renn Tan

On 15 May 2020, the Monetary Authority of Singapore (the MAS) issued its response to feedback about its proposed regulatory approach for derivative contracts that reference payment tokens as underlying assets (Payment Token Derivatives), confirming that it will regulate Payment Token Derivatives offered to Singapore investors through approved exchanges. (See MAS’ current list of approved exchanges.) The MAS considers it crucial that it has effective oversight of products offered on approved exchanges due to the systemic importance of such trading facilities and the risk of contagion to the wider financial system.

The report encourages the G20 to consider a broad set of supervisory principles when evaluating global stablecoin arrangements.

By Todd Beauchamp, Stuart Davis, Christian F. McDermott, Yvette D. Valdez, Stephen P. Wink, Simon Hawkins, and Deric Behar

On April 14, 2020, the G20’s Financial Stability Board (FSB) published a consultation on the regulation, supervision, and oversight of privately issued global stablecoins (Addressing the Regulatory, Supervisory and Oversight Challenges Raised by “Global Stablecoin” Arrangements). The consultation includes 10 high-level recommendations that promote a multilateral approach to oversight defined by flexibility, consistency, coordination, and information-sharing between jurisdictions to keep apace of the changing nature of the risks posed by global stablecoins. While acknowledging the potential financial service benefits of global stablecoins, the FSB highlights some of the downstream impacts global stablecoins may have on national economies, across borders, and on the global financial system.

Latham derivatives and FinTech partner Yvette Valdez explores regulatory issues impacting cryptocurrency derivatives on the Fintech Beat podcast.

By Yvette D. Valdez

New York partner Yvette Valdez, a member of Latham & Watkins’ FinTech Industry Group, recently discussed timely issues at the intersection of cryptoassets and derivatives law on a new episode of Fintech Beat.

Valdez spoke with host Chris Brummer about a number of regulatory issues impacting cryptocurrency derivatives, including:

  • Whether cryptocurrencies or stablecoins are inherently derivatives
  • The ramifications of being deemed a derivative
  • Cryptocurrency derivatives and tokenized derivatives
  • Considerations for token developers to better navigate the regulatory field
  • The potential pitfalls of the Simple Agreement for Future Tokens (SAFT) from a commodities regulatory point of view
  • The Automated Convertible Note, a free-to-use tool developed by Latham & Watkins in collaboration with ConsenSys and OpenLaw, which addresses future token sales in a manner compliant with US securities and commodities regulations

Latham FinTech partners discuss the evolving stablecoin landscape on the New Territories Podcast.

By Christian F. McDermott, Yvette D. Valdez, and Stephen P. Wink

New York partners Yvette Valdez and Stephen Wink and London partner Christian McDermott recently discussed the evolving stablecoin landscape on new episodes of The Brooklyn Project’s New Territories Podcast.

The partners, who are members of Latham & Watkins FinTech Industry Group, spoke with host Joyce Lai about a number of trends and regulatory issues impacting digital assets and blockchain technology, including:

  • Macro trends and geopolitical shifts
  • State-sponsored digital assets and payment systems
  • Status of digital assets under US securities laws
  • Stablecoin considerations (and complications) under US commodities laws
  • Decentralized finance
  • Global privacy considerations for potential issuers and other participants when designing and operating a stablecoin ecosystem

Global monetary authorities and financial regulators have responded forcefully to the advent of privately developed global stablecoins.

By Todd Beauchamp, David L. Concannon, Stephen P. Wink, Simon Hawkins, Stuart Davis, and Deric Behar

A new report highlights the risks of global stablecoins and enumerates the legal, regulatory, and oversight hurdles a global stablecoin must clear before launching. The Group of Seven Working Group on Stablecoins released the report, titled Investigating the Impact of Global Stablecoins (G7 Report), at the October 2019 International Monetary Fund annual meeting. The G7 Report was published in tandem with a report by the Financial Stability Board (FSB) on the Regulatory Issues of Stablecoins (FSB Report). Taken together, the two reports provide insight into how some of the world’s most advanced economies (the US, the UK, Canada, France, Germany, Italy, and Japan) view digital assets and stablecoins, particularly those with the potential to launch and quickly scale on an established private-sector global network.