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Cryptocurrency: New bill proposes to make “managed stablecoins” securities

Posted: 22 November 2019 4:14 pm
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Regulators may inadvertently stamp out other stablecoins in an effort to stomp Libra.

A new bill proposed by a bipartisan team of US senators proposes to make "managed stablecoins" securities. The bill is called the "Managed Stablecoins are Securities Act of 2019".

As a security, stablecoins would be subject to a range of additional controls and restrictions, as befits an investment rather than a currency. It was introduced specifically to put a clamp on Facebook's Libra cryptocurrency, but would apply to anything which meets the definition of a managed stablecoin.

The precise definition of "managed stablecoin" per the bill is a digital asset that is not already registered as a security under existing laws, and which fits at least one of the following criteria:

  1. Its market value is significantly or entirely determined by reference to the value of a pool or a basket of assets, including digital assets, which are being held by one or more people.
  2. Holders of the managed stablecoin are entitled to other assets, including digital assets or fiat currency, in exchange for the stablecoin, with the amount they are entitled to being determined largely on the basis of the value of a pool or basket of assets which are being held by one or more people.

And the definition of "digital asset" is "any asset, contract, agreement or transaction, including a representation of an economic, proprietary, or access right, that is stored in a computer-readable form and has or will have a transaction history that is recorded in a distributed ledger, digital ledger or other digital data structure".

Opinion: Bad bill

Disclaimer: This is not a qualified, legal, or even particularly well-informed, reading of the bill.

This is a bad bill, firstly because it's a blatant misapplication of the actual intention of securities laws. Securities laws were intended to protect investors by putting tall barriers around investments. But here, they're just being used as a convenient excuse to put tall barriers around stablecoins, simply to keep people away rather than to genuinely protect investors.

Regardless of whether Libra poses a threat to US monetary sovereignty, and regardless of whether banning it is a smart move, classifying all "managed stablecoins" as securities is not in line with the intention of securities laws.

Granted, stablecoins arguably are securities anyway, even without this bill.

As it says:

"Because issuers of managed stablecoins.... maintain that managed stablecoins are not securities, it is appropriate for Congress to provide clarity by amending statutory definitions of the term "security" to include managed stablecoins."

But that just goes to show that stablecoins are falling into a gap between the spirit of the law (protect investors) and the letter of the law (if its value is derived by underlying assets it's a security). As they say, where enforcing the letter of the law means violating the spirit of the law, you change the law.

Victims Beneficiaries

So, other than Libra, who's going to be affected by the regulatory clarity that this bill so graciously bestows on them?

Other collateralised stablecoins are the most obvious victims beneficiaries.

Tether obviously satisfies this criteria, and if the bill passes in its current form, USDT would be considered a security. Paxos (PAX), TrueUSD (TUSD), Circle USD (USDC) and others of that ilk will also fall under the category of "managed stablecoins".

This bill would also cover MakerDAO and the Dai stablecoin, its DeFi credentials notwithstanding. The value of Dai is determined in reference to MKR, and MKR is being held by people.

It may also put the clamps on projects like Abra, which hold funds on behalf of users while letting them choose how their holdings are denominated. It looks like user funds could technically become "managed stablecoins" as soon as a user denominates them in a way that differs from the form the underlying assets take.

Things get even blurrier elsewhere. With projects such as Synthetix, for example, users can mint their own synthetic assets (stablecoins) whose value is based on the underlying SNX token. These synthetics assets can then be traded, and anyone can burn them to unlock the SNX that's backing it. But you don't have to burn the exact same assets that you minted.

Do these synthetic assets technically become managed stablecoins whenever they are held by someone other than the person who minted it? Or do they magically turn into managed stablecoins only when the holder does not have enough SNX holdings to back the synthetic assets they are holding?

Headscratchers

If you take it to extremes, there's also an argument that a lot of other things would inadvertently become managed stablecoins under this definition.

Specifically, the broad definition of "digital assets" and the fact that anything which has value largely determined by reference to digital assets, could encompass a lot of things.

How about original ownership of a stock photo, which entitles one to royalties whenever it's downloaded?

It's clearly a digital asset because it's a representation of economic, proprietary and access rights stored in a computer-readable form. And it's also a managed stablecoin under this definition, because its market value is significantly determined in reference to the value of a pool of digital assets (all the other images on the platform) which is managed by the stock image company.

The same line of reasoning arguably applies to YouTube videos. They are digital assets which have a market value determined entirely in reference to a pool of advertiser dollars.

And how about the money in a bank transfer?

The funds in a bank account are digital assets, because they're a representation of an economic right that is stored in a computer-readable form, with a transaction history stored in a digital data structure. When you make an electronic bank transfer you're arguably using "managed stablecoins" because the value of the funds being transferred is determined by reference to a pool of digital assets; the funds in your bank account.

Special treatment

Needless to say, if this bill passes it obviously won't be applied to these inconvenient technicalities, similar to the way McDonalds can disguise an illegal security sale as a fun promotion just because it uses familiar, physical tokens, while someone else doing exactly the same thing with digital tokens on a blockchain risks ending up behind bars.

For better or worse, a lot of extra attention is being lavished on blockchain, cryptocurrency and stablecoins.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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