Where do potential issuers of so-called stablecoins go from here and what next?
by Edmund Yong
If you are considering to issue a stablecoin, here are a few points to help you get started. Do not rely on online research alone because you can be easily sidetracked by lay opinions or outdated regulations.
- Stablecoin is merely a marketing term.
The authorities will look at the substance of the token and not just what it is called. They are so-called stablecoins by virtue of it being stable in value (which may not necessarily be true), pegged to something stable for that effect (like illiquid real estate), or carries a stabilization mechanism (a self-adjustable peg for instance).
Depending on its structure, a stablecoin willl be covered under FATF Standards either as a traditional financial asset or as a virtual asset. FATF made it clear that there should never be a situation where a stablecoin is not covered as they deliberately made the definition of virtual asset broad enough and tech-neutral.
- It’s not only about getting a licence.
While there is no specific licensing for stablecoins at time of writing, this may not be the case for long. The issuer needs to be well-acquainted and grounded with other applicable laws for relevant activities. For example, the Money Services Business Act 2011 (Act 731) provides for the requisite licensing, regulation and supervision of MSBs defined in Section 2(a)-(c) as those in the business of money-changing, remittance and wholesale currency services. In some cases, the stablecoin might fit the description of e-money or debenture.
- Study the other models around you.
There are some precedents in Malaysia. Created as a gold asset-backed token in 2017, the HelloGold stablecoin is based on the cumulative holdings of investment grade gold endowed to the HelloGold Foundation in Singapore by a related management company, up to a lifetime maximum of 3.8 metric tonnes (3,800,000 grams) of gold.
Back in 2018 the Ho Wah Genting Group, a junket operator and online entertainment gaming provider, announced a stablecoin pegged to USD500 million reserves held in bank deposit. Based on a disclosure statement, the issuer HWGG is not a subsidiary or related associated company but a privately held venture related to the founder of HWGB, a public listed entity on Bursa Malaysia. The stablecoin was approved by the Labuan Financial Services Authority (Labuan FSA), which also took part in the inauguration ceremony.
- Not all stablecoins pose the same risk.
It might come to you as a surprise that centralized stablecoins could raise more questions for regulators than decentralized ones. This is because the main concern are stablecoins which have the potential for mass adoption or rapid scaling. For all its benefits, decentralization may act as a natural barrier for widespread adoption, as there is no identifiable central governance body to promote trust in the system and the network has to be built up from scratch without an established telecommunications or financial platform.
This is an evolving space. Eventually what you will find is that the whole value chain of stablecoins from issuance to redemption, stabilization to validation, transfer to custody will be regulated.
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