Regulatory strategies adopted by USD stablecoin issuers

This link takes you to a short post by JP Koning which summarises some work he has done identifying the different regulatory approaches that USD stablecoin issuers have adopted

The list is not exhaustive as Koning confines his survey to USD stablecoins backed (at least in in theory) by conventional USD assets (i.e. not decentralised versions with crypto asset backing and algorithmic protocols). He notes the role “Fincel” regulation plays but argues that this is more a process of registration than of regulation and so excludes it from his assessment.

Subject to these qualifications, Koning identifies four strategies:
1) The New York Department of Financial Services (NYDFS) trust company model [Paxos, Gemini, BUSD]
2) The Nevada state-chartered trust model [TrueUSD, HUSD]
3) Multiple money transmitter license model [USDC]
4) Stay offshore [Tether]

Which approach offers stablecoin users the greatest protection? The short answer is the New York Department of Financial Services model …

So from a customer’s perspective, you are probably better off owning a stablecoin operating under either the NYDFS or Nevada model, rather than the dozens of money transmitter licenses model. Not only do the NYDFS or Nevada model have more oversight (because trusts generally face more oversight than money transmitters), but they are legally obligated to keep the interests of their customers first and foremost. And the trust model probably provides better protection in the event of bankruptcy.

There is another difference between the NYDFS model and the dozens of money transmitter licenses model. Money transmitter licenses are generic. That is, they are a regulatory umbrella for a variety of very different businesses models, including remittance companies like Western Union, wallets like PayPal or Skrill, and finally stablecoins like USD Coin.

Compare this to the NYDFS model, which explicitly recognizes stablecoins and has created a specific process for authorizing and examining these products. (Nevada has not. The Nevada model is also a generic one). If I owned a bunch of stablecoins, I’d probably prefer if the regulator of these products had acknowledged them.

Moneyness – the blog of JP Koning, 6 August 2021

The taxonomy of regulatory strategies is useful in itself and Koning’s observations all seem sound to me. It is also useful to see which approaches have been adopted by the main stablecoin issuers.

In the interests of balance, I also suggest this interview with Sam Bankman-Fried (Founder and CEO of cryptocurrency exchange FTX) and Matt Levine (Bloomberg Opinion columnist) from the Odd Lots podcast which offers a more coherent defence of Tether than the ones mounted by Tether itself (the defence starts around the 47 minute mark).

Tony – From the Outside