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PayPal Launches USD-backed Stablecoin; Coinbase Seeks Dismissal; UK Stablecoin Update

PayPal Launches USD-backed Stablecoin

What happened?

On Monday, PayPal, the U.S-based international fintech, together with Paxos, launched an asset-backed stablecoin on the Ethereum blockchain under the name of PayPal USD (PYUSD).

PYUSD is specifically backed by U.S. dollar deposits, short-term treasuries, and similar cash equivalents such as money market instruments. Users will be able to transfer PYUSD between PayPal accounts and “compatible” external wallets, send payments, and pay for purchases at the checkouts of e-commerce websites.

What does this mean?

Unlike existing custodial stablecoins like USDC, it appears to us that an individual will either not be able to self-custody PYUSD or not be able to send payments of PYUSD to wallets that have not gone through some permission-ing process. Fintech’s often refer to payments using apps like Venmo as being “peer-to-peer,” and that term is understood differently in the context of crypto. In addition, PayPal explains that one will be able to “transfer to Ethereum wallet addresses that accept PYUSD in just a few steps” (emphasis added). Which wallets will PayPal allow to “accept” PYUSD is not clear, but it’s not all ethereum wallets. Additionally, like all custodial stablecoins, PYUSD is a centralized token—which means PayPal maintains the ability to pause transfers, freeze assets, increase the supply, etc.

Also, it’s stablecoin summer, apparently. PayPal’s move on Monday and the Fed’s no-action letter—in this instance a letter seemingly designed to ensure no bank takes action in the stablecoin space—follows the House Financial Services Committee’s markup and bipartisan approval of stablecoin regulation. PayPal’s announcement of PYUSD joins on the increasing institutional crypto adoption, exemplified by the increasing number of Bitcoin ETF filings, and recent advancements of several landmark bills.

Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), noted that “This announcement is a clear signal that stablecoins—if issued under a clear regulatory framework—hold promise as a pillar of our 21st-century payments system.” On the contrary, Ranking Member Maxine Waters (D-CA) expressed deep concern that another stablecoin was issued without a “Federal framework for regulation, oversight, and enforcement of these assets” and expressed her belief that the current stablecoin bill will not be signed into law as it is currently drafted.

Coinbase Seeks Dismissal

What Happened?

Coinbase filed a Rule 12(c) motion for judgment on the pleadings, seeking the dismissal of the SEC's lawsuit. Coinbase asserts that the cryptocurrencies it offers are not securities because there is no investment contract between the creators of those cryptocurrencies and the individuals buying them through Coinbase. The brief compares tokens traded on Coinbase’s exchange to the likes of baseball cards:

“one can buy baseball cards on the open market, hoping they appreciate in value, and one will have bought a commodity. This remains true even if the company makes representations about plans to create a premier card trading platform, to drive up the value of the cards it sells.”

The brief also compares the tokens sold on Coinbase to gold, citing to SEC v. Belmont Reid & Co., where the Ninth Circuit held that the value of gold was determined by the market rather than by the seller’s effort to mine it. Additionally, the brief argues, Coinbase users have “no contractual right to anything except ownership of the purchased token” and that “there is no investment of money coupled with a promise of future delivery of anything.”

The brief also neutralizes the SEC’s allegation “that Coinbase acts as an unregistered securities broker” for “offering customers its free digital-asset Wallet software.” Under the Exchange Act, a broker is “any person engaged in the business of effecting transactions in securities for the account of others.” Coinbase correctly points out that a wallet application is simply “passive software” that allows for key storage and serves as an interface for communicating with “third-party platforms” such as protocols. Coinbase concludes that offering a wallet application is not equivalent to the act of taking or processing an order, negotiating transactions, or making investment recommendations.

Next, the brief invalidates the SEC’s “claim that its staking services constitute unregistered securities.” Coinbase allows users to stake their tokens in a proof-of-stake network’s validation process and earn rewards. Coinbase points out that users who stake their tokens with Coinbase are not any more at risk of loss through slashing penalties than if they were staking tokens themselves. Furthermore, a user does not relinquish control of their assets to Coinbase in order to stake with its staking program. The brief dismisses the SEC’s allegation that Coinbase engages in managerial efforts of any kind by explaining that Coinbase does not have the power to influence user rewards from staking, which are instead dictated by the blockchain’s consensus protocol.

What Does This Mean?

Coinbase’s brief makes thoughtful arguments in response to the SEC’s allegations. Should the court grant Coinbase’s Rule 12(c) motion in its entirety, the case would be dismissed, which would set serious precedent for the crypto industry. However, it is important to keep in mind that a Rule 12(c) motion requires the Court to decide based on only the facts that are before it in the pleadings (the Complaint and Answer), without the benefit of any factual development in the discovery process. This means that even if Coinbase does not win this motion, the case goes on and there will be additional chances for Coinbase to defend itself.

UK Considers Empowering Bank of England for Stablecoin Regulation

What Happened?

The UK Treasury has released a consultation paper detailing potential regulatory approaches to stablecoins. This development comes after the government collected feedback from significant industry stakeholders such as PayPal, HSBC UK, Circle, and Barclays. The paper proposes that the Bank of England (BoE) could be granted oversight of stablecoins, working in collaboration with the Financial Conduct Authority (FCA).

The Treasury's analysis has concluded that the Banking Act of 2009 offers the BoE sufficient regulatory authority over stablecoins. However, there are plans to further refine and clarify the Bank's regulatory tools. The report suggests that if the BoE is designated to supervise stablecoins, it would be responsible for "prudential matters," “including capital and liquidity management, and limitations to business operations or activities where these are necessary,” while the FCA would oversee conduct.

What Does This Mean?

The UK government's consideration to clarify and possibly expand the BoE's regulatory toolkit to include asset-backed stablecoins indicates a proactive approach to ensure that regulatory capabilities evolve in line with rapidly advancing digital payments. If implemented, the BoE's mandate on prudential matters could help establish a clear regulatory system for stablecoin issuance in the UK. Ultimately, the direction the UK chooses will be influential, setting a benchmark for other nations grappling with the challenges and opportunities posed by digital currencies.


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