How to Regulate Stablecoins – Exploring the Debatable Land between Securities and Payment Regulation

A great deal of confusion is caused by posing the question ‘are stablecoins money?’ This confuses two different legal categories—one being ‘money’, the other being ‘that which when tendered discharges a debt’. The second includes the first. However, it also includes a variety of other things, which are collectively categorised as ‘payment instruments’.

A payment instrument is an instrument—usually transferrable—which embodies a claim for money of some form on some person, and whose purpose is to be delivered in final settlement of a money obligation. The existing class of payment instruments includes promissory notes, bills of exchange, some cheques, transferable letters of credit, and a number of others. Viewed from this perspective, stablecoins are simply tokenised payment instruments.

However, the status of payment instruments within the existing regulatory system is unclear, and this lack of clarity causes difficulties for those policymakers—most notably the UK—whose approach to crypto-regulation is to bring stablecoins, along with all other cryptoassets, within the securities regulatory framework. 

The difference between payment instruments and debt securities is not always immediately apparent—both embody a promise by a person to pay an amount of money which is potentially transferrable. Payment instruments therefore sit in the liminal space between securities and payment regulation. It is fair to say that both securities and payment regulation largely deal with them by ignoring them. However, the development of this new class of tokenised payment instruments raises a set of policy issues sufficiently important to require a closer examination of this area. 

Once the problem is identified, it is not hard to see the difficulties which arise as regards the regulation of payment instruments. Should holding such instruments for another be regarded as custody, banking or something else entirely? Should securities rules such as best execution apply to transactions in payment instruments? Should arranging or advising on transactions in payment instruments be regulated in the same way as arranging or advising on securities transactions? 

I have produced a short paper examining some of the issues which arise in seeking to fit stablecoins into existing regulatory paradigms. It concludes that attempting to apply the existing securities regulatory model to stablecoins may severely reduce their utility.

The author’s complete article can be accessed here.

Simon Gleeson is a Visiting Professor at the University of Oxford and a Bye-Fellow of Fitzwilliam College, Cambridge.