#273—How the UK will regulate stablecoins

Also, the SEC goes after Paypal

Nov 06, 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:

How the UK will regulate stablecoins
The SEC goes after Paypal
Everything FTX
What people are reading: Crypto’s most wanted man
What people are reading: Jack Dorsey’s civil war
It’s the 10-year anniversary of “unicorn”
Stuff happens

1. How the UK will regulate stablecoins

The UK Treasury just “unveiled definitive proposals” on how they will regulate stablecoins last week.

Here’s Blockworks:

The Treasury aims to regulate fiat-backed stablecoins in two key areas: their use in payment systems and their issuance and storage within the UK, regardless of specific applications.
The suggested regulations will place specific fiat-backed stablecoins under the oversight of the Bank of England, the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR).
Together, they will work to reduce potential harm to consumers and address the conduct, financial stability and other risks associated with these stablecoins, especially when used for transactions.

The U.S. continues to lag in this arena, but Senator Cynthia Lummis, speaking to Yahoo Finance, revealed there could be progress by the end of the year, prompted by the continued growth of Tether:

Another thing that's happening with Tether is their stablecoin is a significant holder of US Treasury bonds. So because they are a big enough player in that space, there's some risk to the US of having the stablecoin unregulated. So we've been really working with Patrick McHenry and the House to get the stablecoin component of our bill moving.
And we're flexible. Senator Gillibrand and I see the small differences between the House and the Senate versions specifically related to stablecoins. We know they're resolvable and we're flexible with regard to that. So I think we're going to be able to get to a resolution on stablecoin. Now that the US House has this wonderful new Speaker and they're, again, open for business, we think we can turn our attention once again to the stablecoin component of our bill, possibly even still before the end of this calendar year.

Elsewhere in tokenized money:

2. The SEC goes after Paypal

But there’s trouble in stablecoin land after Paypal got hit with an SEC subpoena.

Here’s The Block:

Payments giant PayPal is currently under regulatory scrutiny by the United States Securities and Exchange Commission in connection with its PYUSD stablecoin.
"On November 1, 2023, we received a subpoena from the U.S. SEC Division of Enforcement relating to PayPal USD stablecoin," the company disclosed in a Form 10-Q filed with the SEC on Wednesday. "The subpoena requests the production of documents. We are cooperating with the SEC in connection with this request."
…
PayPal launched its PYUSD stablecoin in August through a partnership with the crypto firm Paxos, saying that the stablecoin is regulated and fully backed. PYUSD is issued by Paxos, which is subject to regulatory oversight by the New York State Department of Financial Services (NYDFS), and PayPal has a BitLicense from NYDFS, PayPal said at the time.
…
The SEC has previously accused Binance's BUSD, another stablecoin issued by Paxos, of being an unregistered security in its lawsuit against Binance in June. In February, the SEC issued a Wells Notice to Paxos, indicating a potential enforcement action based on the allegation that BUSD constitutes an unregistered security. However, Paxos disputed the SEC staff's position, saying that BUSD does not qualify as a security under federal securities laws and said it is "prepared to vigorously litigate if necessary."

The worry is that if the SEC considers PYUSD a security, then pretty much anything could be classified as such.

Here’s Daniel Kuhn over at Coindesk:

Stablecoins, in this sense, resemble checking accounts, giftcards, reward points and … PayPal’s primary product — the cash-equivalent tokens used for online money transfers.
Campbell referred to this situation as a “reductio ad absurdum.” Effectively, the SEC can say anything is a security as long as they say it is. To be fair, others like crypto-focused lawyers Brian Frye and Lewis Cohen have made similar remarks, in part because the Howey Test is vague enough, technically, where any purchase that could lead to a profit — from fine art to collectible sneakers — could be considered a securities offering.

That would be par for the course with Gary Gensler’s SEC regime, which, by the way, may have broken the law, according to the US Government Accountability Office.

Here’s Blockworks:

The US Government Accountability Office found that the Securities and Exchange Commission did not follow the Congressional Review Act in issuing Staff Accounting Bulletin 121.
SAB 121 was first issued back in March 2022. It said that the crypto assets of bank customers should be held on the balance sheet of the banks. But, GAO argues, it never should have been issued without Congressional review first due to it falling under the criteria of rule.
Before a rule can take effect under the CRA, the regulatory agency needs to file a report with the House of Representatives, the Senate and the Comptroller General.
The SEC initially issued it to provide “interpretive guidance.” However, GAO argues, the bulletin is not an “agency action.”
“We conclude the Bulletin is a rule for purposes of CRA because it meets the APA definition of a rule, and no exceptions apply,’ GAO wrote Tuesday.
“In its response to us, SEC maintained that the Bulletin is not subject to CRA because it does not meet the APA definition of a rule as it is not an ‘agency statement’ of ‘future effect,’” GAO continued. It added it disagreed with the SEC’s findings.
Additionally, GAO found that none of the exceptions applied to the bulletin.

Relevant:

3. Everything FTX

4. What people are reading: Crypto’s most wanted man

Here’s the WSJ and how they finally caught Do Kwon:

Fallen crypto tycoon Do Kwon was ready to get out of Montenegro. He and his colleague arrived at the small Balkan country’s main airport, where a Bombardier business jet was waiting to take them to Dubai.
Inside the VIP terminal, Kwon handed his passport to an immigration officer, who swiped it. An alert flashed across the officer’s screen. Kwon, it said, was the target of an Interpol red notice—a request to police around the world to arrest him.
Kwon had been lying low in the Balkans for months, but his luck was running out. About two hours earlier that day, March 23, a tipster had separately warned Montenegro’s top cop, Interior Minister Filip Adžić, that Kwon was likely in the country.

5. What people are reading: Jack Dorsey’s civil war

Here’s The Information:

As CEO of Twitter, Jack Dorsey was widely panned for his hands-off style, seen as contributing to the company’s uneven growth and slow-to-evolve culture, which paved the way for last year’s takeover by Elon Musk. Dorsey’s other public company, Block, originally known as Square, has a whole different problem: Its divisions feud so intensely they can’t agree on even minor points of cooperation.
For example, last year staffers from Square, a payments processing service popular among small and medium-size businesses, and its sibling division, Cash App, which is similar to Venmo, got bogged down in a negotiation over sharing technology to integrate Apple Pay’s Tap to Pay on iPhone feature. No one from Block, including CEO Dorsey, intervened to resolve the fighting. Today, the dispute still hasn’t been resolved: While Square offers the Tap to Pay on iPhone feature, Cash App doesn’t.

6. It’s the 10-year anniversary of the term “unicorn”

Where it all started—Looking back with Techcrunch:

Why do investors seem to care about “billion dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns. For example – to return just the initial capital of a $400 million venture fund, that might mean needing to own 20 percent of two different $1 billion companies, or 20 percent of a $2 billion company when the company is acquired or goes public.
So, we wondered, as we’re a year into our new fund (which doesn’t need to back billion-dollar companies to succeed, but hey, we like to learn): how likely is it for a startup to achieve a billion-dollar valuation? Is there anything we can learn from the mega hits of the past decade, like Facebook, LinkedIn and Workday?

USBC

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