For Startups

Legal Status of Stablecoins and their Transformation into Electronic Money

Throughout the history of cryptocurrencies, their high volatility has remained one of their signature characteristics, opening great possibilities for trading, yet making them lack stability to be used as an everyday mean of payment. That was until stablecoins saw the light of day. They were designed to combat what many think is the biggest flaw of digital currencies – their volatility.

So, what are stablecoins? Stablecoin is a record in a blockchain, tied to another asset, which in turn reduces its price volatility and fixes its price. Just like with any virtual asset, its legal status is mainly defined by its economic content. Depending on the design of a stablecoin, it can be either fiat-backed (Tether, TrueUSD), cryptocurrency-backed (BitShares, Dai, Havven), or algorithmic (Ampleforth, Basis).

Both fiat- and cryptocurrency-backed (together sometimes referred to as “asset-backed”) stablecoins are designed in a way, where an asset with a defined value (e.g. USD, BTC, gold) supports its exchange rate. The exchange rate of an algorithmic stablecoin, on the other hand, is supported by an algorithm, that automatically corrects the supply of the latter in an event of its shortage or surplus. This process is also known as “seigniorage”.

As with any blockchain-based asset, the question as to whether a stablecoin falls under any effective legislation is crucial for the purposes of regulatory compliance. Generally speaking, if a person purchases stablecoins with an expectation of profit, a stablecoin can constitute security. Therefore, fiat-backed stablecoins are likely not to fall under the definition of security in most of the jurisdictions. This is because expectation of profit does not usually arise in relation to stablecoins pegged to a fiat currency.

On the contrary, stablecoins backed by precious metals like gold and those that constitute shares in an algorithmic seigniorage system, will most likely be bought with an expectation of profit, thus being investments, and fall under the scope of securities legislation.

However, issuing stablecoins backed by fiat currencies is still considered a regulated activity and requires a license. For example, in September 2018, the New York State Department of Financial Services has authorized Gemini and Paxos to issue a price-stable cryptocurrency pegged to the U.S. dollar. TrueUSD is another example of a company that has received a U.S. authorization, operating under the Money Services Business license issued by the Financial Crimes Enforcement Network.

As one might argue, “backing” a blockchain asset by a fiat currency not only brings in some degree of centralization (even more so, if a business requires a license to do it) but also leads to such stablecoins representing a claim on the underlying currency. This thesis is supported by the fact that some companies choose to apply for the Electronic Money Institution license (e.g. Monerium). Electronic money generally constitutes a right to claim, rather than “money” in its traditional meaning.

Some believe that stablecoins are the “Holy Grail of Cryptocurrency” and we should definitely expect the rise in their popularity in 2019.

In our earlier article, you can read about our plans to introduce stablecoins as means for payment for services on our Platform.

Nik Kliapets, Legal Counsel of Legal Nodes

Legal Nodes Blog

For Startups
Ultimate guide to connecting Virtual Data Protection Officer

Connecting Virtual DPO can greatly reduce start-up’s data protection costs. This article explains who the Data Protection Officer is, why you should consider outsourcing DPO services, and how to pick one that matches the needs of your business....

Legal Nodes Team
Privacy (GDPR)
Cookie Policy: How to Track Website Users Lawfully

The recent study of the Nederlandse Omroep Stichting (the ‘NOS’), a Dutch news media, showed that more than 1,300 Dutch websites violate the privacy of their users. The violation found by the NOS is simple - the users cannot use the websites wit...

Legal Nodes Team
For Startups
Why Your Startup Needs a Founders' Agreement + Template 2021

Founders Agreement – the key step to set clear intentions for you and your partners and to avoid misunderstandings in the future. In a new post on the Legal Nodes blog, we explain what a Founders Agreement is, reasons for your startup to prepare...

Legal Nodes Team
For Startups
Terms of Use that your users will actually read

In this article Legal Nodes Team talks about Terms of Use, how to write them effectively and why you need them in the first place. You could find a FREE template at the end of this article....

Legal Nodes Team
Privacy (GDPR)
How Can You Leverage a Privacy Kit More Effectively?

In this article, Punit Bhatia, a leading privacy expert, shares how small businesses can become privacy compliant by using Privacy Kits in an effective and why just branding the documents and templates in name of your company is not a good idea....

Punit Bhatia
Legal Nodes Updates
Legal Nodes in 2020: A Year in Review

Despite the fact that for many 2020 will be strongly associated with the coronavirus pandemic and lockdown measures, it would be a mistake to forget all the good things that happened this year. Especially when the festive season approaches, and ...

Legal Nodes Team
Privacy (GDPR)
Internet data mining. Is it legal in the EU?

Data mining is the process of collecting and analyzing human-readable data for own purposes. More and more businesses are built on that concept, scientists and medics also use automatically combined data from different sources to spawn predictio...

Ewa Wojnarska-Krajewska
Privacy (GDPR)
11 simple (but complete) steps towards the GDPR compliance in 2020

The GDPR can be a wake-up call to sort out your processes, procedures and technology and thereby run a more successful organisation. Data is now more essential than ever, regardless of your activities or market sector. Not only will efficiencies...

Thomas Hayes
Contract Work
Force Majeure Clauses and the Effect of Coronavirus on Businesses

The coronavirus pandemic has made force majeure clauses one of the hottest legal topics worldwide. To help businesses navigate this issue, we asked Tom Bohills, an English qualified lawyer and the Founder of Chronos Law, to explain the backgrou...

Tom Bohills