US Stablecoin Issuers Publish New Details on US Dollar Reserves
By Robert A. Musiala Jr.
This week, Circle, the issuer of USDC – a cryptocurrency “stablecoin” with each unit backed 1:1 by U.S. dollars – published its latest reserve attestation issued by a U.S. public accounting firm. According to a blog post, Circle’s reserve attestations will now include “a breakdown of dollar-denominated reserve assets, which are all held in the care, custody and control of U.S.-regulated financial institutions and in line with laws and guidelines from our U.S. state money transmission regulators.”
The blog post notes that “[w]hile public disclosure of reserves is not currently a regulatory requirement for stablecoins or privately issued digital currencies, we want to continue leading the sector with greater transparency … especially as the role of dollar digital currencies grows in importance in the global financial system.” According to the blog post, “USDC in circulation has grown more than 2,600% since the beginning of 2021.” This week, Circle also announced a new initiative with a major U.S. financial services firm to “use USDC to facilitate crypto-to-fiat conversions” and “test using USDC as a means for card issuers to more easily settle payments.”
In a related blog post, Paxos, the issuer of the U.S. dollar-backed stablecoins PAX and BUSD, disclosed details about the reserves backing PAX and BUSD. The blog post includes a comparison of the reserves backing PAX, BUSD, USDC and tether. And it distinguishes the PAX, BUSD and GUSD stablecoins from USDC and tether by noting the differences in reserve assets backing the stablecoins and by noting that PAX, BUSD and GUSD are issued by trust companies regulated by the New York State Department of Financial Services.
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US Treasury, Bank of Canada and Academics Address Stablecoins and CBDCs
By Joanna F. Wasick
Early this week, the secretary of the U.S. Treasury convened the President’s Working Group on Financial Markets (PWG) with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to discuss stablecoins (cryptocurrencies backed by a fiat currency). Meeting topics included the rapid growth of stablecoins, their potential use for making payments, and possible risks to end users, the financial system and national security. The secretary underscored the need for a regulatory framework for these cryptocurrencies. The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, current U.S. regulations, and how to address any regulatory gaps. The PWG expects to issue recommendations in the coming months.
The Bank of Canada published a paper this week addressing the competition and innovation arguments for issuing a central bank digital currency (CBDC). According to the paper, CBDCs foster the public policy objectives of competition and innovation in the growing digital economy. The paper describes two scenarios that the bank first identified in 2020 that warrant the issuance of a CBDC. The first involves an economy where cash is not widely used, which leads to significant adverse consequences, especially for disadvantaged groups. The second scenario is one where alternative cryptocurrencies like bitcoin and stablecoins become widely adopted in Canada, thereby threatening the country’s monetary sovereignty. While the paper finds positive reasons to issue a CBDC, it concludes that more research is needed.
“Taming Wildcat Stablecoins,” an article written by a Yale professor of finance and an attorney at the board of governors of the Federal Reserve System, was also published this week. The article posits that stablecoins are just the newest type of private money – similar to private money issued in the free banking era of the mid-1800s. The authors argue that private money is an ineffective medium of exchange because it is not always accepted at par and is subject to runs. The paper also presents proposals, such as regulating stablecoin issuers like banks and issuing CBDCs, to address systemic risks created by stablecoins.
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Australian and Georgian Governments Launch Blockchain Initiatives
By Jordan R. Silversmith
The Australian government recently awarded $4.2 million through its Blockchain Pilot Grant program to two blockchain-based pilot projects. The grants were provided to a London-based blockchain provenance startup and a Canadian consultancy blockchain firm. According to the government, the two grants will help accelerate Australia’s adoption of blockchain and will permit businesses to use blockchain technology to solve real-world problems.
The country of Georgia, meanwhile, will begin collaborating with a London-based blockchain platform to promote its millennia-old wine industry. According to a recent report, the relationship will tokenize selected Georgian wines as nunfungible tokens (NFTs), with each NFT backed by an actual wine bottle. The NFTs will be available on a blockchain platform, allowing users to buy, sell and trade bottles with greater confidence in their quality and provenance. The country hopes that using blockchain technology to ensure a wine’s provenance will help modernize the industry and allow for greater international visibility.
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Crypto Financial Services Firm Targeted by State Securities Regulators
By Keith R. Murphy and Robert A. Musiala Jr.
The New Jersey Bureau of Securities (BOS) this week issued a cease and desist Order (Order) to financial services platform BlockFi in order to prevent the company from offering certain cryptocurrency interest-bearing accounts in or from New Jersey. According to the Order, the BOS alleges that BlockFi, through certain of its affiliates, has been funding its proprietary trading and lending operations by allowing investors to purchase cryptocurrency interest accounts, referred to as “BlockFi Interest Accounts” (BIAs), which the BOS asserts are unregistered securities.
The Order further alleges that the BIA’s are not registered with any securities regulatory authority, are not exempt from registration, nor are they protected by certain federal programs designed to protect investors. The provisions of the Order, which were effective July 22, 2021, do not preclude BlockFi or its affiliates from paying interest on existing BIAs or refunding principal to existing BIA investors.
In a separate but similar action, a recent press release notes that the Alabama Securities Commission has issued a show-cause order (SCO) to BlockFi, requiring that the company show cause why it should not be directed to cease and desist from selling unregistered securities in Alabama. According to the press release, the SCO alleges, among other things, that BlockFi’s BIAs are securities and that despite advertising itself as a U.S.-regulated entity, BlockFi does not disclose to its investors that the BIAs are not registered with any securities regulator.
In yet a third state action against BlockFi this week, the Texas State Securities Board filed a cease and desist order (Order) against BlockFi and two of its subsidiaries based on similar allegations that BlockFi’s offering of BIA products are sales of unregistered securities. The Texas Order alleges that as of March 31, 2021, BlockFi had more than $15 billion in assets under management, including $691 million from state residents. Among other things, the Order notes that while BlockFi is licensed as a money services business in Texas, it is not registered with the U.S. Securities and Exchange Commission or the Texas State Securities Board to offer or sell securities in Texas. The Order also alleges that BlockFi is not disclosing material information necessary for investors to make an informed decision about the risks of investing in the BIA products.
For more information, please refer to the following links:
SEC Enforcement Actions Target Cryptocurrency-Related Misrepresentations
By Kayley B. Sullivan
This week, according to press releases issued by the U.S. Securities and Exchange Commission (SEC), the SEC brought two enforcement actions against companies accused of, among other things, making false representations related to cryptocurrencies. In the first, a company which purports to be a developer of mobile phone applications allegedly made false statements that it had developed an application allowing users to transact in cryptocurrencies from their mobile phone, when in fact no such functionality existed. In the second, an action was brought against a company and its founders that told investors their money would be invested in securities trading and cryptocurrencies based on recommendations made by an “artificial intelligence supercomputer.” The SEC alleges that those funds were never invested and were misappropriated.
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