Stablecoins. Did anyone (in crypto) talk about anything else this May?
A Stablecoin Act by August
The GENIUS Act cleared several procedural hurdles with bipartisan support. It is now headed for a final vote in the Senate and a journey through the House. The expectation is for a stablecoin legislation to be submitted for the President’s signature before DC’s summer recess.
To get here, amendments had to be made to secure support from the Senate Democrats, after a blocked cloture vote in April. Those covered anti-money laundering protections and innovations, restrictions around foreign issuers, and the treatment of payment stablecoin issuers in insolvency proceedings.
BigTech Fears in the Balance
One of the most curious debates was around BigTech and their potential expansion into payments territory, giving them the power to “print their own money” or use consumer data to corner markets. It reminded me of European debates on MiCA and on open data, during the Financial Data Access Regulation (FiDA) negotiations.
Then and now, my view is this: legislators and supervisors must ensure that consumer data cannot be leveraged outside the activity for which it was given. But a compliant BigTech firm should not be precluded from an economic activity out of hypothetical fears.
Are Stablecoin Issuers Banks?
Tech, big or not, entering the banking and payments space proves to be an emotive topic. This month, a public debate reignited, aired by the Economist and the FT, on whether stablecoin issuers should simply be required to get a banking license. Respectfully, we disagreed.
Hong Kong Paves Own Stablecoin Pathway
Beyond DC, stablecoins and CBDC were the talk of the town in Hong Kong, the UK, the EU, Bolivia, Dubai, and South Korea.
In May, Hong Kong’s Legislative Council passed a Stablecoin Bill, allowing the issuance of HKD-backed stablecoins. This will allow the three projects currently in the HK Monetary Authority Sandbox to progress to production.
We expect to see an unlock of further issuance interest on or via the Hong Kong market.
UK Arrives at the Stablecoin Party
In the UK, the legislative and regulatory processes are staggered. As HM Treasury is finalising its Statutory Instrument, the FCA opened consultations on intermediary activities, stablecoin issuance, custody, and prudential requirements. (Weekend plans – cancelled.)
What stands out here is that stablecoins will be recognized as investment instruments, causing legal complexities to payment use cases. This is the exact opposite of the EU stance, where e-money tokens are classified as funds, causing regulatory complexity to their use in capital markets.
As a policy choice, this may be a “damned if you do, damned if you don’t” scenario. Still, the industry was, in our view, right to focus on this foreseeable friction in its communication to HMT in May.
Payments Rules (Dis)alignment in the EU
Let’s illustrate the same point from the other side of the English Channel. The Council of the EU is in the final moments of adopting its position on the reviewed Payments Services Directive (PSD3/PSR) – the so-called General Approach. The incumbent Polish Presidency will hold no more meetings on this file.
Under PSD, the transfer of stablecoins is a payment activity. We understand that the latest compromise text excludes transfers for settlement purposes from the scope of the payment rules – a significant outcome, and the result of much public and private industry efforts.
We also expect a simplified authorisation process for EU’s crypto-asset service providers, which do need a PSD license alongside their MiCA authorizations. The regulatory gears are turning— at a European pace.
A Race of Global Regulatory Strategy
New rules create new markets. We expect to see a global proliferation of stablecoin issuance, likely followed by market consolidation in 3-5 years.
Which asset – a stablecoin, a tokenized deposit, or a CBDC – will dominate the tokenized payment rails of the future is a long-standing discussion. Despite theoretical advantages in capital efficiency (deposits) or state backing (CBDCs), both lag stablecoins in time-to-market.
The questions today are: which issuer, what safeguarding and operating model, and which currency peg? While the demand for USD dominates, sovereignty concerns and regulatory clarity are motivating local-currency issuances in Asia and Europe.
Unlike bank deposits, stablecoins are fungible and globally mobile, hinging the issuance race on global regulatory strategy. Therefore, it is incredibly interesting to trace the divergences between the major stablecoin regimes on the treatment of both USD-backed and foreign-issued stablecoins. All developments in May – in the US, in Hong Kong, in the UK, and by Dubai’s VARA – introduce a different read on these requirements.
Regulation Held Equal, Security Takes the Lead
We surveyed 300 banks and payment institutions globally for our bi-annual State of Stablecoin report. Interestingly, at a regional level, where regulatory risk is the same for all market participants, institutions cite competitive pressures as a top driver – this is most true in the EU, where regulation is most mature. And as adoption grows, security moves from differentiator to prerequisite.
Security earns trust. Policy grants permission. The global stablecoin race depends on both.
