Transatlantic Crypto Insights: Stablecoins

Why so much interest of late in stablecoins? We now have mature regulatory frameworks. These frameworks will help folks come into the space and get comfortable that there will be value there when they put money into stablecoins. We're seeing firms now looking into developing stablecoin payment rails, leverage stablecoin collateral. It has a potential to completely change that industry. But then on the other hand, we do have some continued uncertainty. Hello, and welcome to the Latham Tech podcast where we survey the latest trends emerging from the world of tech and explore their impacts on your company. Both the opportunities and the risks. I'm Zach Fallon, Global Co-Chair of Latham's Digital Assets and Web 3 Practice. And joining me today is my fellow Global Co-Chair and partner, Gabe Lakeman. Gabe advises clients on navigating financial regulations and digital assets, payment services, and more. Welcome, Gabe. Great to be here, Zach. So Gabe, what are you seeing with respect to stablecoins? Why the sudden interest is it sudden interest and why so much interest of late in stablecoins? I think it's interesting. We were talking about tokenization before and the interest in that and seeing how people were looking at this area four, five, six years ago. But it's only now it's happening. And the same is definitely true in stablecoins. Again, that was an area where there was a lot of political attention to it a few years back. Governments and sovereigns getting really concerned about control over monetary policy, ultimately. And that prompted some of the early crypto regulation. And I think it had a dampening effect on activity for some time. We're now seeing that pass and we're seeing stablecoins really start to take off again. And in terms of, I think there's a few reasons as to why that is. On the one hand, we now have sort of mature regulatory frameworks in bits of regulation like MECA and PSD2 for payments which can clearly delineate the regulatory framework for provision of stablecoin services. And then we also have an ecosystem that now has firms with multiple licenses, familiar with the technology and able to execute across these different regulatory frameworks. And so we're now in a position where the opportunity is really there, ready to be taken. We're seeing firms, payments firms now looking into developing stablecoin payment rails. We're seeing crypto native firms looking into how they can accept stablecoins, provide brokerage type services with stablecoins, leverage stablecoin collateral. And design all sorts of different financial instruments and products. So yeah, it really does feel like we're at the adoption stage now. Yeah, and it's interesting, you know, having worked in the space a while, I remember a time when advising companies in the space who are raising capital to build in the digital asset space blockchain technology to build DAPs, what have you, layer ones, layer twos. And you know, wasn't that long ago where folks were investing with ETH or Bitcoin as the money, as the currency with which they would make investments in these companies, which, you know, you think of it now. I think of it these days and it seems a bit zany, right? But back then there weren't, there was no stablecoin. And so the emergence of stablecoins, you know, the first use case was really for those types of investors to be able to invest in these companies so that they could, you could build these products because those things didn't exist before. Was that similar in your experience with here in the UK? Yeah, absolutely. And it's also now seeing, you know, these kind of regulated global stablecoin issuers. You have, you know, multi-issue structures with sort of liquidity pools across the, so if, you know, UK, EU and US. And so we really do have the kind of mature product there now. But it's also interesting seeing that on the one hand, we've got that process happening. On the other hand, there still is increasing kind of uncertainty and some regulatory pushback. So in the EU. Yeah, why do you think there is the, what is the pushback coming from, would you say? I mean, there's a few things. I think certainly in the EU, you're seeing people getting concerned around systematic risk. So you're seeing like, like, Christine Lagarde. From the European Central Bank making statements around sort of systematic risk and issues, potential issues with stablecoins in that context and calling for more legislation in the future. And we're seeing, I guess, similar comments by some of the national, um, competent authorities and national regulators across Europe. I mean, be curious to hear what you're hearing in the US. It does feel like a very different environment over there now. Yeah. But now we have the Genus Act. And, you know, basically the first US robust framework for stablecoins and that addresses both federal and state law issues. So I think it's an exciting time in the US, certainly, to have that first piece of really major crypto legislation passed through Congress in a very bipartisan way. I think, you know, always some controversy on the fringe, but the idea being that it makes a lot of sense from a US perspective to have US dollar backs, stablecoins and to sort of facilitate that market, facilitate those types of products into the market. And so I think a very exciting time in the US. I think it's early days, right? There needs to be regulations need to be adopted. The statute sort of basically contemplates as much. And so there will be some time before those are put in place. But nobody's sitting on their hands. In fact, I think it was last week or so. The agencies in charge put out some draft advanced rulemaking notices that sort of said, "Hey, we're thinking about these issues. We want your feedback." And I think that's a good sign that the US is excited about the space. Yeah. And I mean, just picking up your point in terms of the US dollar denominated aspects of stablecoins, I think it's really fascinating in that all the major stablecoins now are US dollar denominated stablecoins. And I wonder whether that is going to itself cause some tension or some sort of regulated developments as you get increasing adoption. Certainly as you get, again, people using them without using intermediaries, able to make effectively sort of fear denominated transfers globally on a peer-to-peer basis. And you can see the enormous opportunity in that. Again, looking at cross-border transfers, if you're doing that with traditional payment rails, you potentially need corresponding banks, multiple payment service providers, you need to interface with some of the kind of global payments infrastructure, which is expensive, takes time to affect transfers. Comparing that with just sort of on-chain peer-to-peer transfer, without any intermediary happening sort of near instantaneously, it's completely, has a potential to completely change that industry. Right. And then on the other hand, if you're a particular jurisdiction, you have your citizens and people in the country now dealing with a US denominated form of currency without any intermediaries and outside your control, that again raises political questions. So I think it'd be curious to see whether that's the next wave of regulatory attention on stablecoins. Very interesting, Gabe. What would you say are the regulatory challenges for stablecoin adoption or implementation of tailored regime for that in the EU and the UK? That is a really interesting question, because on the one hand, we have this regime that's meant to provide certainty in Mika on crypto asset services, including services relating to stablecoins or e-money tokens. But on the other hand, we do have some continued uncertainty because of the potential overlap between that regime and the existing payment services regime, which has raised questions around whether you need two licenses to provide services relating to stablecoins and whether you can provide them in the same entity. How do you even go about doing that when you have conflict regulatory frameworks under the crypto and payments regimes, whereas not practical, in some cases, not even possible to comply with both sets of requirements in relation to the same transaction. So we've had some progress, but it's still some uncertainty remaining. Again, as an area we've seen regulators come in, we've seen some sort of no action, let's assume the regulatory authorities, but it's still some kinks to be worked out, I think, over the next six to twelve months before we can really get full clarity and full of the talk. Yeah, that makes a lot of sense. In the US anyway, with the Genius Act, I think some of those concerns around conflicting regulations have been addressed through the preemption that, basically, the way the statute was enacted and its provisions, which for all intents purposes put a federal regulatory premature on the whole space, unless there's a state regulatory agency that adopts rules that are essentially substantially similar to those at the federal level. And so I think that avoids some of the concerns around having the general federalism issues in the US of having a federal regime that may conflict with state-based regime. And one other really helpful part is they clarified in the act that payment stablecoin would not be considered to be a security or a commodity. And so it would really be carved out in its own special category, which I think is a really interesting approach. It feels like the right approach. Yeah, I mean, this stuff does feel more assimilatable to payment services or money transmission in the US, rather than break-win. And the truth is, if somebody were to offer something that is not fall within the definition of a payment stablecoin, then that kind of dormant question, is it a security then or is it a commodity? would kind of crop up and then need be addressed in the same way. What would you say the primary concern is for the EU regulators and the UK regulators as it relates to stablecoins? I think it's that going back to that question of kind of control over monetary policy and then separately the kind of concerns around systematic risk. It happens when a stablecoin becomes much more embedded in the global financial markets, infrastructure, then if you have a run on a stablecoin issuer, how does that play out, especially when you have issuers, potentially with regulated entities and multiple jurisdictions? With their own batch of assets and each jurisdiction potentially? Yeah, and a global pool of stablecoin holders who are all looking to run for the door at the same time. So I think that's the concern that the consensual banks have on it. One thing we've seen for a number of years now in the crypto are companies living natively with stablecoins as the way they do business and pay vendors. You can completely see that happening in this world. It's a bit of a canary in the coal mine as it relates to how this could play out in real time with real companies, more traditional companies. It's fast-known because you think about that in a, say in a cross-border emittance context. The initial promise of stablecoins is that you can have much cheaper, faster transfers of funds using the stablecoin infrastructure rather than the old trad-file infrastructure. In fact, potentially you just need one crypto asset service provider to do the whole set of the transaction, do the kind of onboarding, do the transfer and potentially do the off-boarding. But then the next step is, well, what if the recipient doesn't want to off-board into Fiat and just keep the funds in stablecoins and then make payments locally in stablecoins? Well, what if the sender is, in fact, receiving, you know, they pay in stablecoins? Then you don't even need the kind of Fiat stablecoin off an on-ramp. And you're suddenly moving into a world where there are no intermediaries. There's just complete freedom for people to transfer their funds directly. As I said, that's certainly been the way a lot of companies have operate in the space for a number of years. Working so closely with them, it's a bit, you get a bit myopic on it and think that, "Well, all companies must operate this way, who are crypto companies, but it's not really the case. We need adoption. These frameworks will help folks come into the space and get comfortable with their will-be value there when they put money into stablecoins." That's absolutely fascinating and it's just going to be so exciting to see that wave of adoption come outside of the crypto world. Yeah, completely agree. I think it's a great place for us to include our discussion on stablecoins and the issues across the Atlantic. Gabe, thank you for joining me. Great to be here. And thank you for tuning into this episode of the Latham Tech Podcast. Part two of our two-part series talking about tokenization in the first part and here are stablecoins. We hope you will join us next time. Thank you. 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