#263—The Fed’s new crypto program

Also, the fastest growing stablecoin is a mystery

Aug 14, 2023

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out our last report here.

This week:

The Fed’s new crypto program
How the industry is reacting
This week in digital money
What we’re reading: The fastest growing stablecoin
Stuff happens

1. The Fed’s new crypto program

A day after Paypal announced its new stablecoin, the first dollar-backed product from a major fintech, the Fed published information on its crypto supervisory program, which includes the handling of stablecoins.

All of this is thrown under the banner of “novel activities”:

Novel activities include complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or "blockchain" technology.

And banks will essentially require written permission to participate. Here’s Axios:

Details: State member banks dealing with stablecoins, whether they are issuing, holding or transacting in them to facilitate payments, are required to show "to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner."
They'll have to get a written non-objection letter from the Fed before doing so.
And still be subject to supervisory reviews and "heightened monitoring" of said activities.

No wonder given a market that Bernstein says will grow to $3 trillion in just five years from just about $125 million today. Here’s Coindesk:

The stablecoin market is expected to grow to $2.8 trillion in the next five years from $125 billion now, broker Bernstein said in a research report Wednesday.
Integration with consumer platforms will lead to a “growth flywheel” for stablecoins — a type of cryptocurrency that's typically pegged to the U.S. dollar — allowing issuers to capture users and expand distribution beyond crypto native platforms, the report said.
“We expect major global financial and consumer platforms to issue co-branded stablecoins to power value-exchange on their platforms,” analysts led by Gautam Chhugani wrote.

2. How the industry is reacting

As is typical, it’s a mixed bag. Here’s Blockworks:

Some crypto industry members saw the efforts as a welcome intervention from federal regulators after months of begging for clearer guidelines.
“This is an extremely important step in that it provides greater regulatory clarity for those banks looking to custody crypto, support the use of stable coins, and engage in other activities related to digital ledger technology,” Martin Grant, former chief compliance officer at the New York Fed and current global head of regulatory affairs at JST Digital, said.
Others were dubious the new rules would promote innovation as opposed to creating more barriers.
“I worry that this portends to be the Fed opening up to the existence and staying power of stablecoins when in reality they’re creating an untenable pathway to compliance through a subjective non-objection process they have complete control over,” Cody Carbone, vice president of policy at the Chamber of Digital Commerce, said.

For others, it’s already notable that the Fed is paying attention:

On the other hand, the Fed’s decision to create the program and increase its rules signal that the central bank may be coming around to blockchain as a disruptive technology, John Rizzo, senior vice president for public affairs at Clyde Group, said.
“Crypto opponents will argue that this decision is an indictment of crypto’s inherent risks; however, the decision is a recognition that Congress and federal regulators have moved too slowly to get a regulatory framework for crypto assets in place,” Rizzo said.

3. This week in digital money

4. What we’re reading: The fastest growing stablecoin

And yet no one knows who controls it. Here’s the WSJ:

A $3 billion mystery is gripping the crypto market.
TrueUSD is one of the fastest-growing stablecoins—cryptocurrencies pegged to real-world money such as the U.S. dollar that investors use to trade in and out of the digital-currency market. Its market value has more than doubled to about $3 billion since March, making it the fifth-largest stablecoin, according to CoinGecko data. Its share of stablecoin volume on centralized crypto exchanges has climbed to 20% from less than 1% at the start of the year, according to the data provider Kaiko.
No one is sure who controls it.
The crypto entrepreneurs Rafael Cosman and Daniel Jaiyong An created TrueUSD in March 2018 as co-founders of the San Francisco startup TrustLabs. The company, which was later rebranded as Archblock, raised funding from Peter Thiel’s Founders Fund, Stanford University-affiliated StartX, Andreessen Horowitz and Jump Trading.
Archblock sold the intellectual-property rights of TrueUSD to a little-known company called Techteryx in December 2020, but Archblock still operated the token and was responsible for managing its reserves, working with banking partners and overseeing compliance until July.
Techteryx has almost no online presence: Cosman described the company in a 2021 post as an Asia-based consortium with businesses in the real-estate, entertainment, environmental and information-technology industries.
…
“Anytime the governance of a stablecoin is unclear, that is a big cause for concern,” said Clara Medalie, director of research at Kaiko. “Even though TrueUSD is not yet systemically important to crypto, there are still millions of traders around the world that could be exposed to this.”
What is more, the co-founders of TrueUSD are now locked in a bitter legal dispute over the circumstances surrounding An’s departure.
In a recent lawsuit, An said that the crypto tycoon Justin Sun negotiated a deal to buy TrueUSD in 2020, but that An was pushed out as chief executive of the stablecoin’s parent company before the deal was finalized. His statements added fuel to market speculation that Sun is the mastermind behind TrueUSD’s sudden growth.
Sun has repeatedly denied any involvement with TrueUSD or Techteryx. He is well-known in crypto circles as the founder of the blockchain company Tron. He is the effective leader of Huobi, a major crypto exchange originally based in China, The Wall Street Journal previously reported.

A Crypto Mystery: Who Controls This Fast-Growing Stablecoin?

Yaka Stuff