Deng Jianpeng: Thoughts on Stablecoin Supervision Countermeasures

In September 2021, the People’s Bank of China, in conjunction with the Supreme Court, the Supreme Procuratorate and other ministries and commissions, issued the “Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading The main characteristics of monetary authority issuing, using encryption technology and distributed accounts or similar technologies, and being in digital form, are not legally compensated, and should not and cannot be used as currency in the market.” This is the first time the central bank has issued it since 2013. Since the regulatory documents involving virtual currencies, it is the first time to notice the risks of stable currencies such as TEDA, and it is also the first attempt to regulate stable currencies such as TEDA. The author has been paying close attention to stablecoins for many years. In particular, this unregulated stable currency TEDA, according to statistics, holds about 60% of its share by Chinese investors, so the potential risks to the property rights of Chinese citizens are the greatest. The author has always believed that stablecoins led by TEDA coins should be highly valued by China’s financial regulators. In this article, aiming at the huge potential risks of stablecoins, a series of regulatory countermeasures are proposed for the reference of financial regulators.

learn from practical experience stable currency outside Regulation

Stablecoins have the potential to be widely adopted by virtue of the advantages of price stability mechanism, no entry barriers, programmable, low payment cost, and rapid cross-domain circulation global network effects, and bring challenges to the international community and sovereign countries to cope with their risks. In particular, Chinese investors have become the main force in stablecoin transactions, and Chinese scholars have not yet comprehensively studied the risks of stablecoins, clarified relevant regulatory rules, and adopted effective measures. How to deal with the risks of stablecoins and incorporate them into regulatory regulations? While drawing on the experience of foreign stable currency supervision, this part intends to discuss its legal attributes in conjunction with the economic activities of stable coins, to determine the direction of supervision, and to propose specific ways to deal with stable currency risks.

Responding to the risks of mortgage-based stablecoins is becoming a top priority for the international community and the financial regulatory agencies of sovereign countries. Since 2019, some researchers and regulatory agencies have begun to explore the regulatory thinking of mortgage-based stablecoins.

First, adopt principled supervision and promote rule design. Douglas Ana put forward the five major regulatory principles for stablecoins, namely, access supervision, informal cooperation methods, the formulation of international standards, the implementation of special supervision for “global stablecoins” and the consideration of the influence of stablecoins on the disintermediation of traditional banks. 32] On the basis of clear regulatory principles, scholars further explored the possibility of incorporating stablecoins into the existing legal framework to build their legal basis, such as clarifying the final rules of stablecoin payment, applying the rules of good faith acquisition, etc., and treating mortgage-type stablecoins as The indirect holding certificate of legal assets or virtual currency can be legally recognized and dealt with by referring to the “Indirect Holding of Securities (Representative Holding)” rules of the Securities Law. 33] 320

Second, clarify the subject and scope of stablecoin supervision. The U.S. Office of the Comptroller of the Currency encourages commercial banks to provide fund custody services for regulated stablecoins, and strictly requires custodian banks to monitor customer relationships, the sources and uses of custody funds, and implement risk assessments. 34] The European Union included stablecoins under the supervision of the European Banking Authority, and issued a more comprehensive regulatory decree on the registered capital, issuance scale, market access and other content and procedures of stablecoins, focusing on the issuer’s fund management and preparation. Three aspects of gold custody and investor rights protection. 35]  Scholars further sorted out the scope of supervision of stablecoins, including compliance governance, financial authenticity, security and efficiency of payment systems, network security and operational flexibility, data privacy, investor rights protection, taxation, etc.; For stable currencies in circulation, special attention should be paid to their impact on monetary policy transmission, financial stability, the international monetary system, and fair competition. 36]

Third, regulatory agencies can give full play to the role of blockchain financial market transaction service intermediaries and secondary markets, strengthen the supervision of virtual currency exchanges and traditional financial intermediaries, and strengthen the regulatory guidelines of international financial regulatory agencies. In recent years, international financial organizations such as the Group of Seven Industries (G7), the Financial Stability Board, the Basel Committee on Banking Supervision, and the Financial Action Task Force have issued research reports and regulatory guidelines to build a stable currency regulatory framework. For example, the Financial Stability Board issued ten high-level supervisory recommendations for global stablecoins; the Basel Banking Committee included stablecoins in the macro-prudential capital adequacy regulatory framework  [ 37] ; the Anti-Money Laundering Financial Action Task Force aimed at stablecoins, anti-money laundering, Anti-terrorist financing issued a series of regulatory frameworks and action guidelines. 38]

It can be seen that foreign regulatory agencies and scholars have a high consensus on the regulatory response of mortgage-based stablecoins. They learn from the regulatory rules of financial technology and blockchain finance to strengthen stable currency supervision and penetrate the functional essence of mortgage-based stablecoins. Regulatory bodies, regulatory content, and regulatory methods have built a stable currency regulatory framework in multiple ways to provide a reference for my country’s regulatory stable currency.

However, there are three shortcomings in the above-mentioned foreign stable currency supervision research:

(1) Regarding the identification of legal nature, most of the existing studies analyze the relationship between stablecoins and currencies from an economic perspective, without detailed analysis of the legal attributes of different stablecoins. This has also led to the supervision and enforcement of stablecoins and related judicial judgments. Puzzled;

(2) In terms of regulatory strategy, the above research only partially mentioned the regulatory response of the United States, the European Union and international organizations to fiat-collateralized stablecoins. How to incorporate all types of stablecoins into the regulatory framework has not been covered by existing research; 36]

(3) In terms of research methods, most of the above-mentioned regulatory strategies for stablecoins are based on ought to be analyzed, and there is a lack of case studies and practical investigations at the actual level. Multiple regulatory dimensions, perspectives, and methods need to be explored.

2. Clarify the legal attributes of stablecoins

In the real world, the judiciary effectively responds to lawsuits involving stablecoins, and it is a prerequisite to clarify its legal attributes. Some scholars have come to the conclusion that stable currency is not equivalent to legal tender based on the theory of currency state, credit theory, and system theory. 26] There are three reasons: (1) Stable coins are issued by centralized private entities, private institutions or algorithms act as credit intermediaries and market making, and the credit foundation is weak; (2) Although stable coins have external expressions in the form of digital currencies And it has certain currency functions, but it is not recognized by sovereign governments and laws; (3) The current stablecoin market is limited in scale and usage scenarios, and its ability to respond to external shocks is weak, and multiple private stablecoins in the market conflict with each other. A complete and independent monetary system cannot be formed, so stablecoins will not shake the status of sovereign currencies. 39] 25-35

Based on this, scholars have explored the legal attributes of stablecoins from the perspectives of quasi-currency and non-monetary assets in accordance with the legal frameworks of the United States, the European Union and other countries/regions. There are two main viewpoints, namely, the theory of currency tokens and the theory of financial instruments. Currency tokens are represented by some academics and regulatory agencies in the European Union, the United Kingdom, and the United States. According to the British Payment Service Regulatory Act, fiat-collateralized stablecoins such as TEDA coins may conform to the regulatory framework of “electronic money”. 40] In some states of the United States (such as Texas), stablecoins are considered to be carriers of “money or monetary value”, representing claims that can be redeemed in fiat currencies, that is, cash tokens or USD tokens. 41] 58-79 In other words, penetrating the essence of the economy, mortgage-based stablecoins essentially represent cash and demand deposits in the form of currency, and can be used as cash-based electronic tokens 17]1-47 , which belong to the category of quasi-currency. Different from the above, some scholars believe that stablecoins can be regarded as investment asset certificates or collective asset plans due to the assets anchored behind them or the bonds and equity tokens issued according to the algorithmic mechanism, and they are included in the EU Financial Instruments Market Directive. The scope of regulation. 42] 1-20 stable coins are used as financial instruments or financial assets in the blockchain finance field  [ 43] 135 , representing the debts of the issuer and the claims of investors, for trading and investment. 

It can be seen that, as a new thing, the identification of the nature and legal attributes of stablecoins is a complicated process. Different countries have different understandings of laws and regulatory agencies and may come to different conclusions. This article believes that in accordance with China’s newly revised “People’s Bank of China Law (Draft for Comment)” Article 22, “No unit or individual may make or sell tokens, coupons and digital tokens to replace the circulation of RMB in the market” legislation Spirit, it is not appropriate to incorporate USD-collateralized stablecoins (such as TEDA coins) issued by foreign private institutions as electronic currency into the current payment system. The legal currency-collateralized stablecoins anchored to the US dollar can be regarded as USD tokens representing USD asset claims, that is, foreign currency. Tokens are subject to supervision or stricter restrictions in accordance with relevant regulations on foreign exchange management. For virtual currency mortgaged stablecoins and algorithmic stablecoins, their structural design and operation are more inclined to innovative financial products, which can be included in the category of financial instruments as investment tools or alternative assets with payment functions, which are more helpful to guide domestic Supervision and judicial practice. A further question is, on the basis of selecting and clarifying the legal attributes of stablecoins, how to implement effective supervision and response to them, in order to balance security, innovation and investor interest protection?

3. Countermeasures for stable currency supervision

In the long run, sovereign states will not allow unregulated stablecoins to prevail in the global market for a long time. For example, in the second half of 2020, the New York State Attorney General’s Office filed a lawsuit against Tether, the issuer of Tether, and accused it. There is fraud. 44] In recent years, the people who hold and use stablecoins (especially TEDA coins) the most come from China. From the perspective of maintaining the stability of the financial market and protecting the legal property rights of Chinese investors, China should fully recognize the necessity and urgency of stablecoin supervision, incorporate various stablecoins into the legal system, and give full play to the “Development Promotion Law” and “risk prevention”. The functions of modern economic law such as “control law” 45]131-140 , guide the financial regulatory authorities to implement good stable currency governance. Combining the current institutional environment and the development status of stablecoins, my country’s regulatory agencies can penetrate the essence of stablecoins, and strengthen the supervision and regulation of stablecoins in parallel from five aspects: active supervision, functional supervision, technical supervision, legal regulation and coordinated supervision.

1. Active supervision. Supervision should follow the principles of initiative, timeliness, and risk detection. Take the United States as an example. In 2019, the Office of the Attorney General of New York State proactively investigated and prosecuted Teda and Exchange Ye (Bitfinex, “leaf” is its Chinese nickname) based on its long-arm jurisdiction. After two years of litigation, the two parties reached a settlement. In addition to paying $18.5 million, TEDA also promised to increase operational transparency and provide quarterly audit reports to the New York State Attorney General’s Office and the public. 44] The above-mentioned cases reflect that the active supervision of the United States has exerted obvious influence on the compliance operation of stablecoin issuers and the protection of the rights and interests of American investors. Drawing on the regulatory experience of the United States, my country’s public security, procuratorial organs, and financial regulatory agencies can take the initiative to implement regulatory inquiries and require overseas stablecoin issuers to perform asset audits, information disclosure, data reporting, suspicious transaction reporting and other obligations, proactively discover and accurately identify The market, credit and fraud risks associated with stablecoins protect the property interests and financial security of domestic investors.

2. Function supervision and behavior supervision. Combined with functional supervision theory, supervision should conform to and penetrate the functions of different financial products and financial behaviors to implement supervision activities. Regardless of the stablecoin structure and underlying technology, mortgage stablecoins and algorithmic stablecoins can follow the principle of “same business, same risk, and same supervision”. In fact, the main function and goal of stablecoins is to act as a stable means of payment, so sovereign states can step in to strengthen the regulation of stablecoins from the payment field.

Specifically, first, sovereign countries can clarify the regulatory path for stablecoins in terms of access supervision, reserve supervision, risk preparation, internal control, anti-money laundering, and foreign exchange management. Especially in terms of access supervision, the banking regulatory authority can act as the competent authority to implement stable currency access permits and formulate stable currency regulatory guidelines with reference to the regulatory standards and rules of the payment business. The U.S. Office of the Comptroller of the Currency and the European Union Banking Authority are both responsible for leading the supervision of stablecoins. Chinese regulators also stated that if stablecoins are widely used as payment methods, strict supervision similar to banks or quasi-banks needs to be implemented. 46] It should be noted that for unregulated stablecoins such as TEDA that are pegged to the US dollar, if they become proliferation in China, priority can be given to using foreign exchange management and anti-money laundering supervision methods to restrict them, and to combat disruption of foreign exchange management. Illegal and criminal acts of order and financial order. Second, the front-line anti-money laundering supervision function of virtual currency exchanges should be strengthened. Use territorial supervision and supplementary personal supervision ideas to put forward compliance requirements for virtual currency exchanges, requiring them to establish information announcements, major suspicious transaction reports, transaction data archiving, and illegal delisting systems, in accordance with the “fund travel rules” 38] Strengthen anti-money laundering reporting obligations, and set risk trigger boundaries for large, high-frequency, and suspicious transactions. Third, supervision also needs to formulate stablecoin reserve audit specifications, risk control mechanisms, and privacy protection mechanisms, and require issuers to set aside risk reserves 37] so that investors can be compensated for property losses due to issuers. 

3. Technical supervision. The blockchain distributed network and encryption technology are the technical infrastructure for the issuance and circulation of stable coins. In the era of digital economy, it is necessary to strengthen the coordination and resonance of technology, supervision, and the market, and use regulatory technology to deal with the risks and challenges brought by blockchain financial innovations such as stable coins. Douglas Ana put forward the idea of ​​regulating stablecoins from regulation to supervision: embedding regulatory requirements into the stablecoin system itself, and implementing “embedded supervision” 32] , that is, supervision uses big data, blockchain, artificial intelligence and other technologies to build The blockchain data monitoring and security platform embeds smart contracts in stable currency systems, virtual currency exchanges and even blockchain decentralized applications, tracking transaction hashes, wallet addresses and identification information that exceed the risk threshold, and targeting sources Unknown and illegal stablecoins or legal currency funds are investigated and frozen transaction addresses and legal currency accounts to strengthen the construction of stable currency anti-money laundering mechanisms. At the same time, supervision should strengthen the algorithm audit of stablecoins, and check the security, stability and compliance of smart contracts of mortgage stablecoins and algorithmic stablecoins. In particular, certain algorithmic stablecoins can be penetrated through the underlying code. The operating model of the company has been incorporated into the regulatory framework. 27]

4. Give full play to the supplementary regulations of the judiciary. Establish a prudent and inclusive stablecoin judicial and financial supervision coordination mechanism. In an environment where legislation and law enforcement rules are not yet clear, procuratorial organs, public security organs, and courts are encouraged to strengthen supervision and restraint on stablecoin projects, and link stablecoin project teams, stablecoin wholesalers, and virtual currency exchanges within China Companies, operating managers and actual controllers are included in the jurisdiction. 47]97-107 At the same time, the judicial practice department can provide “complementary rule of rule” through case judgments, and explore the judicial judgment rules of stablecoins in related civil and criminal cases in combination with the legal attributes of stablecoins. Use methods such as judgments, guiding cases, and judicial interpretations to unify the application of laws and provide normative guidance for stablecoin legislation and supervision.

5. Coordinated supervision. Blockchain technology and stablecoins naturally have the characteristics of decentralization and borderlessness. It is difficult for the regulations and law enforcement power of a single sovereign country to cover all. It is also necessary for supervision to cross the boundaries of a country to establish a stablecoin cross-border supervision and coordinated supervision model. To deal with its future risks and development. On the one hand, financially developed countries, countries with large economies, and international organizations first formulate stable currency risk supervision guidelines and regulatory standards, which can include risk identification, attribute identification, regulatory principles, regulatory frameworks, regulatory methods, etc., especially for mortgage-based stability The currency sets the capital and reserve adequacy ratios to enhance the risk mitigation capabilities of stable currency issuers 37] , and provide regulatory references for specific countries. On the other hand, different countries are encouraged to establish stable currency cross-border/cross-regional supervision and coordination mechanisms, establish stable currency cross-border payment and settlement monitoring systems, and strengthen the supervision and crackdown on the use of stable currency money laundering, terrorist financing and other illegal activities. Through information sharing and joint law enforcement, seek to bring unregulated stablecoins into the jurisdiction. At the same time, sovereign countries can learn from the practice of financial technology regulatory sandboxes, use stablecoins to conduct payment and risk tests within a controllable range, and evaluate and test stablecoin regulatory policies and tools. Sovereign countries can also adopt the idea of ​​alternative supervision. Accelerate the implementation of the central bank’s legal digital currency to partially replace unregulated private stablecoins, reduce their penetration and utilization in financial transactions, and reduce the level of the multi-level blockchain ecosystem driven by private stablecoins 48 ]75-124 , reduce the complexity of the virtual currency market structure, the opacity of the financial system and the variability of stable currency risks, and promote the internal compliance and external supervision and governance of stable currencies.

Fourth , the conclusion

In blockchain financial innovation, stablecoins are considered to have the potential to transform the global payment system, expand financial inclusion and financial inclusion, but at the same time pose challenges to financial supervision, financial infrastructure and investor protection. At present, domestic stablecoins have not been paid enough attention and research, and there are generally insufficient academic research, gaps in legislation, law enforcement, and judicial practice dilemmas. This article sorts out the existing research on the connotation and type of stable currency, risks and supervision in three aspects, clarifies the necessity and urgency of stable currency supervision, and discusses the characterization of stable currency as a foreign currency token that is different from legal currency and legal digital currency. Or financial instruments with payment functions, and on this basis, explore and refine the stable currency supervision and regulation ideas that meet the goals of my country’s financial supervision. Theorists say that strengthening the supervision and regulation of stablecoins, balancing the relationship between blockchain financial innovation, risk prevention and control, and investor rights protection, and promoting the sound and perfection of the modern financial supervision system are the establishment of the “14th Five-Year Plan” period. The due meaning of a scientific and effective macroeconomic governance system is also an objective requirement for promoting the modernization of the national governance system and governance capabilities. 49]59-68 In the future, scholars can continue to conduct research on the stablecoin itself, the supervision of stablecoins , and how the current payment system responds to the challenges of stablecoins , pay attention to the risk evolution of stablecoins; explore stablecoin anti-money laundering and foreign exchange Regulatory measures in the field; seek the response of traditional payment institutions to the impact of stablecoins, etc., to further guide the innovation and compliance development of the blockchain finance field, and to enhance the regulatory capabilities and supervision quality of the regulatory agencies in the blockchain finance field .


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