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#Stablecoin Dramas -- The Empire Strikes Back

Updated: Oct 16, 2019

The week before Facebook CEO Mark Zuckerberg testifies to the House Financial Services Committee, cryptocurrency enthusiasts and stablecoin issuers must be disappointed, but they should not be surprised. All year, policymakers have consistently been expressing interest in extending the regulatory perimeter to cover “Big Tech,” blockchain, and stablecoin issuers. We wrote about it HERE and HERE and HERE and HERE.

The velocity of policy activity increased directly in response to the Libra Association’s proposals in mid-summer. So when today’s Financial Stability Board (FSB) report to the G20 was issued today, few should have been surprised. The press release delivered a likely deliberately clear statement designed to make the cryptocurrency and stabecoin sectors sit up and take notice:

“Stablecoin projects of potentially global reach and magnitude must meet the highest regulatory standards and be subject to prudential supervision and oversight.”

This statement is NOT just aimed at the Libra Association. JPMorgan’s stable coin is also in the crosshairs, as discussed HERE in March.

The FSB report makes clear that policymakers are methodically creating a roadmap for increased regulation with pre-set inflection points.

Anyone implementing our How To Trade The News framework probably is already setting in place trading strategies in relation to these inflection points.

But before we get to the future, let's look at the policy activity in the last few days.

The developments provide another helpful case study in why and how measuring policy momentum can generate superior insights.

Activity in the last few days

It has been a busy few days in the stablecoin universe, with multiple entities releasing information in the “graveyard” time slots of Friday afternoon and Sunday afternoon. Fortunately for those that follow Rule 5 (Be Relentless) and use our patented technology, the updates and inflection points have been easy to spot.

  • Friday Afternoon: Visa, Ebay, Stripe, and MasterCard all announced that they are withdrawing from the Libra Association. Leaks to the Wall Street Journal earlier this month suggested this move was possible.

  • Sunday Afternoon: The FSB releases its report to the G20 indicating not only that stablecoin issuers will be subject to significant regulatory scrutiny but that a specific timeline will govern the rule-making process well into 2020.

Now consider the Wednesday news item that Facebook CEO Mark Zuckerberg has agreed to testify before the House Financial Services Committee.

The news cycle thus encompasses Wednesday afternoon to Sunday afternoon. The net impact is clear: an inflection point is approaching rapidly regarding stablecoin regulation.

Of course, “rapid” in regulator terms means months. The cycle will extend well into 2020.

What It Means (Business)

Our blog readers from the summer of 2019 will remember THIS POST analyzing the potentially significant economic reach of the Libra Association proposal. The proposal was remakable in ambition, incorporating every major global consumer payments company alongside major retailers of consumer goods and services.

The defection of PayPal, MasterCard, Visa, Ebay, and Stripe diminish significantly the immediate economic reach of the Libra Proposal. The new Libra Economy now looks like this:

There is no clear global provider of payment services for transactions denominated in Libra at this stage. PayU and Mercado Pago are niche players.

Now compare the sectoral distribution of companies from the original proposal (on the left) and the current configuration (on the right:

The proportion of Venture Capital and Retail have increased significantly with the departure of one retailer and three payments companies. If the data were weighted by economic size, the shifts would be far more dramatic. With all due respect to UPay and Mercado Pago, the reality is that they do not have the same scale and ubiquitous reach of PayPal, MasterCard and Visa.

A more subtle business impact arises from the elimination of global payment companies. The Libra Association originally sought to operate as a global board of directors, effectively offloading to the major payment systems companies the responsibility for regulatory compliance. This is not longer possible.

The Swiss regulatory decision last month to require the Libra Association to apply for a payment system license effectively requires the Libra Association to take direct responsibility for the daily activities of the payment system. The defection of existing payments providers implies that the potentially revolutionary Distributed Age business model is giving way to more traditional structures.

This is not all bad news for the Libra Association.

The defection of globally significant payment systems companies means that the stablecoin overnight has ceased to become systemically significant. With apologies to Uber, Lyft, and AirBnB, the reality is that consumer now can only pay for an economically small set of services and no goods using the Libra stablecoin. Mr. Zucerkberg can now truthfully testify to Confress that the Libra Assciation and the stablecoin project are not at risk of replacing the global reserve currency.

Before regulatory enthusiasts break out the champagne, it is important to note a few potential side-effects from the “real economy” defection from this stablecoin project. If the Libra Association successfully floats a new global currency that achieves scale in the altruistic economy sectors and in the alternative transportation/tourism sectors, the real possibility exists that a parallel economy will gain traction globally.

The policy issues from here become extremely difficult:

  • Will these transactions be subject to taxation?

  • How should policymakers evaluate the competitive landscape for antitrust purposes if the parallel economy grows significantly?

  • How will routine anti-money laundering and counter-terrorism finance regulatory reporting frameworks operate in this parallel economy?

Market evolution will not follow a linear path. As the events in September and this weekend illustrate, a profound reaction function exists between market structure and regulatory policy at the innovation frontier. Get out the popcorn. Both markets and regulators are literally going to make up the rules as they move forward.

What it Means (Regulatory Policy)

Global policymakers have been actively engaged in expanding the regulatory perimeter all year, as noted above. When Swiss regulators last month made clear that the Libra Association would be required to apply for a payment system license and potentially could be subject to a broad range of additional regulatory requirements not just in Switzerland but also internationally, we noticed and alerted our customers and blog readers HERE.

The following week saw policymakers meeting with stablecoin issuers in Basel and the month closed with a major policy conference hosted in Paris by the Organization for Economic Cooperation and Development (OECD). We told our subscribers in the C | P | C Report and the FinTech RegTrends Report that the writing on the wall was clear: policymakers were pivoting actively towards expanding the regulatory perimeter.

This is a slow moving train. Long periods of inactivity will be punctuated by significant statements. Stay tuned. Our patented technology is focused like a laser on the language and movement of these policy areas. Our customers and subscribers will be ready for each twist in the trajectory.

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