Stablecoin Summer: How Three Months of Policy And Innovation Could Shape the Future of the Ecosystem

Ari Redbord and Angela Ang discuss recent developments which made the summer of 2023 a hot one for stablecoins.

The summer of 2023 was a hot one for stablecoins. We saw policy action in APAC, the EU’s Markets In Crypto Asset legislation – and its stablecoin provisions – pass in Europe, and much anticipated stablecoin legislation finally make its way out of committee in the United States Congress. Circle expanded to six new blockchains, and, in perhaps the summer’s biggest news, PayPal launched stablecoin PayPal USD. As summer days have drifted away, what will be the lasting impact of a few hot months for stablecoins?

PayPal Launches PayPal USD as Circle expands

Despite all the regulatory action discussed below, the summer of 2023 may well be remembered for the launch of PayPal USD. On August 7, fintech giant PayPal announced that it was issuing a stablecoin – PayPal USD (PYUSD) – marking a first by a large financial institution. According to Jesse Spiro, Senior Director, Head of Regulatory Relations BCDC at PayPal, “PYUSD will allow consumers, merchants and developers to seamlessly connect fiat and digital currencies.” Paypal currently has more than 431 million active accounts globally, making the move a potential game changer. Here are a few key facts:

• PayPal USD is issued by Paxos and is fully backed by US dollar deposits, short-term Treasuries and similar cash equivalents. Paxos is regulated by the NYDFS and PYUSD will be a regulated product in the state of New York. PayPal was granted a local crypto license by the regulator in June last year.
• PYUSD is pegged to the dollar, redeemable at any time for dollars, and will be gradually available to PayPal’s customers in the U.S.
• PYUSD can also be exchanged for other cryptocurrencies available on PayPal’s network, can be used to fund purchases and will soon be available on Venmo and users will eventually be able to send their token holdings between a PayPal and a Venmo wallet.
• PYUSD will enable instant and lower cost transactions without an intermediary according to Paypal.
• PYUSD can also be moved to compatible third-party wallets outside the PayPal network.
• PayPal expects PYUSD to be used mainly in the crypto and web3 sectors, such as trading in and out of other digital tokens and in-game payments, before eventual adoption in areas like remittances and micro-payments.

According to Bloomberg’s interview with Jose Fernandez da Ponte, head of PayPal’s blockchain and digital currencies team, one of the reasons PayPal is leaning into crypto at this time is the improvements in the U.S. regulatory environment. “The company now believes the regulatory environment is ‘progressing toward more clarity,’” he explained.

Meanwhile, leading stablecoin issuer Circle announced its “‘Stable September to Remember” with the launch of USDC on five new blockchains, including Base, Cosmos via Noble, NEAR, Optimism and Polkadot throughout the month, and a sixth chain, Polygon PoS, in October. The push to other blockchains makes USDC more available to users particularly in the DeFi space serving as a substitute for the dollar across more and more platforms.

Earlier in August, Circle also released a programmable Web3 wallet platform, to facilitate applications to send, receive, and store cryptocurrencies, including USDC. In April, Circle unveiled a protocol that allows users to move USDC between blockchains, with Ethereum and Avalanche serving as the pilot.

As stablecoin issuance gains major momentum, policymakers around the world have responded with consultations, guidance, and regulation.

‍Financial Stability Board provides global perspective on stablecoins

In July, the Financial Stability Board (FSB), the central coordinating body for international standard setting, finalized its High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements. Among other things, the FSB set out certain key characteristics for tokens to be considered as “global stablecoins.” Most importantly, the recommendations include:

• Robust legal claim and timely redemption for all users.
• Requirement of an effective stabilization mechanism such as full backing by high quality, liquid reserve assets, which does not include algorithmic mechanisms or arbitrage activities.
• Single currency stablecoins should be redeemable at par into fiat.

Regulators worldwide have been aligning their stablecoin frameworks toward this definition, signaling global alignment.

Now, let’s take a look at stablecoin policy action across the world.

‍Stablecoin regulation in Asia Pacific

Arguably the first major jurisdiction to go live with a dedicated stablecoin framework was Japan, where a legal framework for stablecoins took effect on June 1, 2023. Under the new law, only certain financial institutions – namely banks, funds transfer service providers and trust companies – are allowed to issue stablecoins. Per FSB recommendations, these stablecoins also must be pegged to a fiat currency and redeemable at par.

Several other APAC jurisdictions have also made strides in regulatory clarity for stablecoins.

The first significant move of 2023 came well before summer from the city of Hong Kong, which finalized its stablecoin regulatory regime in January. The regime sticks closely to the FSB standards, and effectively outlaws algorithmic stablecoins. In addition to issuance, Hong Kong will regulate dealing in stablecoins, including those issued outside of the city. The regime is expected to go live by 2024.

In Australia, where two major national banks, ANZ and the National Australia Bank, have issued AUD-pegged stablecoins, the Commonwealth Treasury proposed to license payment stablecoin issuers as stored value facilities in a June consultation paper. The detailed requirements will be explored in a subsequent consultation.

The last major move of the summer in APAC came from Singapore, where the Monetary Authority of Singapore finalized its stablecoin issuance framework in August. The regime only covers the issuance of single currency stablecoins pegged to the Singapore dollar or a G10 currency, in Singapore. Prospective issuers of such stablecoins can earn the “MAS-regulated stablecoin” label by complying with stringent requirements aligned to the FSB recommendations.  Everything else will continue to be regulated alongside other cryptocurrencies under the existing regime for digital payment token services. Circle, as well as local firms StraitsX and DCS, said they were, “looking at possibilities now that the stablecoin framework is finalized.”

‍Stablecoin regulation in Europe

In June, Europe passed the Market in Cryptoassets Regulation (MiCA). MiCA doesn’t use the term “stablecoin” but it does contain provisions for two stablecoin-like assets, Asset Reference Tokens (ARTs) whose value are tied to a “basket” of assets and Electronic Money Tokens (EMTs) whose value is tied to a single real-world currency. Issuers of ARTs and EMTs will need to gain a license in a European member state and fulfill significant requirements covering governance, reserve management, redemption, complaints and AML/CFT.  MICA also goes further, creating a “significant” class for assets with substantial users and daily transaction flows. These significant issuers will be supervised by the European Banking Authority and will have to conduct regular stress tests. The requirements for ARTs and EMT issuers go live June 30, 2024.

‍Stablecoin regulation in the UK 

Gaining royal assent in early July, the Financial Services and Markets Act (FSMA) captured “stablecoins” in the UK’s future financial services regime. Much like the EU, the FSMA never uses the term “stablecoin” and instead opts for “Digital Settlement Asset” (DSA). DSAs are “digital representation of value or rights, whether or not cryptographically secured” and can be used for settlement of payment obligations, the transfer and storage of value and are enabled by technology such as DLT. The FSMA gives the Treasury the powers to bring these assets into regulation, which is currently being consulted upon. It is expected that the UK might have a regulatory framework for DSAs by summer 2024.

‍Stablecoin regulation in United States

July was also a busy and historic month for crypto on Capitol Hill. For the first time, crypto-specific bills were debated on Capitol Hill and advanced on their own merits and not as part of broader legislation. One of those bills was H.R. 4766, the “Clarity for Payment Stablecoins Act of 2023.” The much anticipated stablecoin bill, which was voted out of the House Financial Services Committee, after seven hours of heated debate, with bipartisan support, creates a legal and regulatory framework for stablecoins.

The bill requires that stablecoin issuers submit certificates to either state or federal regulators with detailed information about their assets, sets parameters for banks issuing stablecoins, establishes capital requirements for stablecoin issuers, and consumer protection guardrails.

The stablecoin bill will still have to make it out of the House of Representatives and then win the support of the Senate which could be an uphill battle, but first steps are meaningful.

September brings it all together

As summer gave way to fall, we saw more international policy action. Last week, the International Monetary Fund and the FSB released a synthesis paper, bringing together policy thinking and global standards for crypto-assets from various international bodies. Reiterating the FSB’s policy recommendations, the paper emphasized the “unique risks” of stablecoins and noted their potential to impact financial stability if they are “broadly adopted as payment instruments.”

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This article was first published on TRM Insights by Ari Redbord, Head of Legal and Government Affairs at TRM Labs; and Angela Ang, Senior Policy Advisor at TRM Labs, and former Deputy Director at MAS.