Law Decoded: Cents and stability, Nov. 20–27

Editor’s note

As many of you were certainly following in real time, a bull market gave way to a bloodbath yesterday, which happened to be Thanksgiving in the United States. Personally, I’ve never thought that Bitcoin’s (BTC) price was any sort of proof of its value proposition, but for many, its retreat yesterday certainly dashed many a planned gloat to family members more receptive to massive gains than concepts like censorship resistance.

But obviously, volatility is part of the game with cryptocurrencies. One of the more prominent solutions to this problem has been the rise of stablecoins, especially following the market’s swan dive at the beginning of 2018. Stablecoins typically derive their value from fiat reserves held at banks or — in the case of, say, Paxos Gold (PAGX) — in vaults.

For the crypto faithful, those pegs obviously pose a centralization concern, not to mention the indignity of depending on fiat currencies like the U.S. dollar. But for the average user — most of whose bills and expenses are still denominated in dollars, or euros, or yuan — stability is what they are looking for. Stability is actually a lot of what the mandate for currency consists of. (Aside: Look how many prepositions I can end sentences with).

At the same time, the regulatory mechanisms for ensuring stability in tokens are still in development. It was only this year that federal banks in the United States got clear authorization to house reserves for stablecoins. Many such coins remain unaccountable. But ultimately, the recent surge in interest in central bank digital currencies, or CBDCs, comes from an interest in replicating the effectiveness of such tokens.

T minus two months on Facebook’s Libra, kinda

Among developments that drew global attention to stablecoins was Facebook announcing that it was launching one back in June 2019. While regulators dismantled the original vision, it looks like the less ambitious dollar-pegged version will be launching in January.

Casting back, the original white paper for Libra laid out a vision of a global stablecoin tied to the value of a “basket of currencies,” similar in principle to the Special Drawing Right. This was one of many, many problems that regulators had with the token. The basket of currencies in question was alterable, fundamentally putting the value of the Libra token in the hands of the governing Libra Association and, per legal thought at the time, ensuring that it was a security rather than a proper currency.

Perhaps more important was the simple fact that Facebook was behind it. In the U.S., the social media giant and one-time wunderkind leader Mark Zuckerberg have seen their names turn to mud, especially following the 2016 election. Despite the intricate arrangement of the Libra Association, which would theoretically have 100 members voting as equals, regulators fundamentally saw it as Facebook’s project. What especially terrified governments was that Facebook’s user base is larger than the population of any sovereign nation on earth, and the platform had already proved vulnerable to extremist groups and human traffickers looking to connect. They hardly seemed ready to handle money itself.

Unlike Satoshi Nakamoto, Congress knew exactly how to find Zuckerberg and make him answer for the proposed creation. Facebook beat a hasty retreat from its original vision. Libra has seemingly been stuck in limbo ever since, periodically announcing a new hire from the legal teams of the U.S. Treasury and especially its money laundering control offices. So, while the news that Facebook is, pending FINMA approval, going to launch anything is big, the version of Libra currently on the table hardly seems the promised revolution.

U.S. intelligence is on the watch for China’s CBDC

Recent reports have it that major figures in U.S. intelligence are on guard for China’s ongoing work to digitize its yuan.

To be fair, this is almost certainly not new. But the level of figures in play is, as is the fact that the director of national intelligence is actually trying to get Jay Clayton, of financial regulator the Securities and Exchange Commission, to ease up on the crypto market in order to keep U.S. development competitive.

As I mentioned in the original story, the concerns over China’s digital currency are two-fold. On one level, there is the assumption that a digital yuan would become a valuable tool of surveillance for the Chinese Communist Party, which is hardly above using any and all available tools to monitor its own citizens. Access to data on money use by a potentially global base of transactions in 2020 is arguably analogous to the secrets of nuclear detonation in 1945.

The second level is just the acknowledgment that the U.S. gets a hell of a lot of mileage out of the privileged place that the dollar occupies, which is not a given. It’s a familiar refrain that China is the most real challenge to the status of sole superpower that the U.S. has held since the USSR toppled. That’s happening in a whole spectrum of ways, but it’s been several generations since Americans have even had to think about the dollar. So, this is big.

But then again, stones, glass houses, etc.

The Bank for International Settlements is suggesting that banks implement data-gathering practices in their CBDCs, as that would be easier than monitoring independent stablecoins like Libra.

Firstly, I would like to make sure I’m not establishing false equivalence: China’s surveillance of its citizens is dystopian and absolutely disgraceful. But it is ironic that so many of the criticisms of China’s potential CBDC are of its potential as a surveillance system, while the European Union and the U.S. still have not committed to resisting exactly the same temptation.

Reservoirs of citizen data are attractive, even irresistible. In the words of the BIS, “Information is a central function of regulation.” It is with the best of declared intentions that governments plead the necessity of knowing increasing information. New technology — namely, machine learning and artificial intelligence — are making those reservoirs more usable than ever. But, like, the line of acceptable loss of privacy keeps creeping in only one direction.

Further reads

Lawyers for Dentons run down stablecoins and CBDCs and their associated legal issues.

For Bloomberg Law, James Munson talks new investigations into crypto by Canada’s securities regulator.

Bennett Cyphers details the data insecurity problem of Visa’s planned acquisition of Plaid, which the Justice Department is trying to stop from happening.