SUMMARY OVERVIEW OF STABLECOINS AND 

THE LAW REGARDING STABLECOINS

CFTC, TECHNOLOGY ADVISORY COMMITTEE

SUBCOMMITTEE ON VIRTUAL CURRENCIES

OCTOBER 3, 2019

PRESENTERS

Gary DeWaal

Special Counsel

Katten Muchin Rosenman LLP

Lee A. Schneider

General Counsel

Block.one

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WHAT ARE STABLECOINS:

 Stablecoins are digital assets that employ one of several techniques to seek to reduce their price volatility against 

other assets. Often, stablecoins have a nominal face value that refers to an asset such as a fiat currency, a physical 

commodity, real estate or a security (the “underlying”). The underlying might also be a basket of assets.

 Stablecoins collateralized by underlying assets sometimes have the underlying assets held by third-party 

custodians. 

 Stablecoins may or may not be redeemable for the underlying assets. They are often are intended to be traded on 

cryptocurrency exchanges. 

 Other stablecoins use algorithms as a means to seek price stability, such as by increasing supply when a token’s 

value rises above, or decreasing it when value falls below, a pre-programmed ‘peg’ (such as 1:1 with USD). 

 Stablecoins are designed to be used for payment and other purposes in connection with crypto and other digital 

assets, often to replace fiat currency as the means of payment.

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WHAT ARE STABLECOINS:

 A stablecoin may have a face amount 

denominated in a fiat currency and may 

be collateralized by that currency or a 

combination of that currency and other 

collateral (e.g., cash equivalents, such as 

certificates of deposits, short-term 

treasury bills or money market mutual 

fund shares) equal in value to the face 

amount of outstanding coins.

 Alternatively, a stablecoin may have a 

face amount denominated in a specified 

measure of a tangible commodity (e.g., 

one troy ounce of gold) and be 

collateralized by that commodity or a 

combination of that commodity and 

other collateral in an amount equal to 

the face amount of outstanding coins. 

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WHAT ARE STABLECOINS:

 A person seeking to purchase a stablecoin from the issuer will typically send funds 

(fiat or virtual) equal to the face amount of a fiat currency stablecoin or the thencurrent fiat currency value of the unit(s) of the physical commodity stablecoin (e.g., 

the dollar cost of one troy ounce of gold). 

 The trustee or administrator of the stablecoin will set aside the funds received (or 

additional adequate collateral) to back the stablecoin and instruct the issuer to mint 

and distribute the appropriate number of stablecoins. 

 Smart contracts may play a role in this process, serving to automate the minting and 

distribution function.

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SUMMARY OF EXAMPLES (based on public sources):

Stablecoin Name How Collateralized Permissioned vs 

Permissionless 

Blockchain

Privacy / 

Confidentiality of 

Transactions

Tether Fiat + other Permissionless Less Private

TrueUSD Fiat + potentially other Permissioned More Private

Turnkey Jet Fiat Permissioned More Private

Libra Basket of fiat and other Permissioned More Private

Paxos Gold Allocated gold Permissioned More Private

Basis N/A Permissionless Less Private

Maker/Dai Cryptoassets Permissionless Less Private

JPM Coin Fiat Permissioned Most Private

USC Fiat Permissioned Most Private

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EXAMPLES OF STABLECOINS (based on public sources):

 Tether. Tether is a US dollar stablecoin 

organized by a company associated with 

Bitfinex exchange. Until February 2019, Tether 

appeared to be collateralized 100% by US 

dollars. In April 2019, the NY Attorney General 

alleged that a substantial portion of Tether’s fiat 

collateral was transferred (without adequate 

legal documentation and without notice to 

purchasers) to another entity to support loan 

repayment obligations of Bitfinex; this legal 

action has now been stayed. Tether is 

redeemable for US dollars.

 TrueUSD. TrueUSD and other TrueFiat 

stablecoins (collectively, “TrueFiat”) are 

stablecoins issued by TrustToken. They are 

intended to be collateralized 100% by the 

reference fiat currency, although cash equivalent 

assets may be used as collateral. TrueFiat are 

redeemable for the reference currency.

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EXAMPLES OF STABLECOINS (based on public sources):

 Turnkey Jet, Inc. Turnkey Jet sought and 

obtained Securities and Exchange Commission noaction relief to issue a stablecoin that could be 

used exclusively to purchase its charter jet 

services. The stablecoin (with a nominal face value 

of $1) would rest on a private blockchain and not 

trade on a cryptocurrency exchange. The TKJ 

token would be redeemable for the issuer’s 

charter jet services. SEC staff said the TKJ token 

would not be a security under securities laws, but 

did not refer to the TKJ token as a stablecoin. TKJ 

tokens will be backed by US dollars in escrow.

 Libra. Libra is a proposed stablecoin that would 

be issued by the Libra Association, an initiative 

spearheaded by Facebook. Libra is not yet fully 

defined, so its features and functions remain to be 

determined, although the white paper suggests 

that it is intended to function as currency in any 

platforms that adopts it, and its value is proposed 

to reflect a blend of several fiat currencies; it is 

proposed to be backed by bank deposits and 

short-term government securities but its 

redemption features are uncertain.

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EXAMPLES OF STABLECOINS (based on public sources):

 Paxos Gold. Paxos Gold (PAXG) is a digital 

asset offered by Paxos Trust Company LLC, a 

New York Department of Financial Services 

licensed limited purpose trust company, where 

one token is backed by one fine troy ounce of a 

400 ounce London Good Delivery gold bar and 

stored in Brink’s gold vaults. Every token is 

associated with the serial number of a specific 

gold bar (e.g., allocated gold). A Paxos Gold 

digital token can be redeemed for a choice of 

fiat currency or physical gold or, for institutional 

customers, for unallocated gold.

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EXAMPLES OF STABLECOINS (based on public sources):

 Basis. Basis was a proposed stablecoin that would 

have relied on two other tokens for stability. Its goal 

was to track the US dollar through an "algorithmic 

central bank." The Basis token would have been the 

stablecoin and stability would have been achieved by 

increasing the supply of “bond tokens” or “equity 

tokens” depending on whether the volatility was 

above the dollar or below the dollar. The mechanism 

was designed to mimic a central bank’s quantitative 

easing and interest rate raising process.The Basis 

project was abandoned by its team due to regulatory 

uncertainty over the status of the bond and equity 

tokens as securities.

 Maker/Dao. Maker/Dao is a US dollar stablecoin 

that utilizes an Ethereum smart contract to lock up 

cryptoasset collateral as a means to create Dai 

stablecoins. Anyone can utilize the smart contract to 

deposit collateral and create Dai. There is also a 

Maker token, the holders of which can vote to 

engage in emergency actions necessary to ensure 

appropriate functioning of the platform and receive 

stability fees. Because collateral is pooled, it is 

possible that significant price swings in the collateral 

will impact the amount of collateral that is returned 

by the smart contract upon redemption of Dai.

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EXAMPLES OF STABLECOINS (based on public sources):

 JPM Coin. JPM Coin is a stablecoin token 

designed to facilitate instantaneous payments 

between institutional clients. A JPM Coin has 

value equivalent to one US dollar, and is backed 

by dollars held by the bank in designated 

accounts. Coins are issued when clients deposit 

money into a designated account. They may be 

transacted between other qualified clients, and 

be redeemed from the bank for USD. These 

steps may occur instantaneously, as to reduce 

settlement time. Early applications of JPM Coin 

have included international payments, debt 

issuance, and treasury services (corporate 

subsidiary transfers).

 Utility Settlement Coin. The Utility 

Settlement Coin (USC) is a stablecoin being 

developed by a group of 14 banks, led by UBS 

and including Credit Suisse, for the settlement 

of international trades. The project is being 

developed by a company called Fnality, funded 

by these banks. USC would represent cash held 

by these banks, and would come in several 

versions, each representing a different currency. 

Fnality hopes to launch the product in 2020. 

The project serves a similar role as JPM Coin. 

However, it appears more aimed toward 

transfers between the banks themselves, rather 

than institutional clients.

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KEY CONSIDERATIONS WHEN REVIEWING A STABLECOIN

 The features and functions of the coin are critical to the utilization and valuation of the coins as well as the legal analysis and regulatory categorization.

 Questions about the underlying asset(s) or item(s) (if any)?

o Is the coin fully backed by and redeemable for the underlying? Is it a digital representation of the underlying?

o How are the underlying custodied?

o If physical assets, how are they tracked?

o Can there be substitutions of underlying?

 Are any financial services being provided and, if so, by whom (there may be multiple providers)?

 Technology neutral regulation is an important principle.

 What disclosures are or should be required of the creator and other parties?

 On September 6, 2019, the Board of Governors and Federal Advisory Council discussed stablecoins among other topics. There was concern expressed that 

an alternative payments system, like Libra, “has the potential to disintermediate some customer activity from banks.” However there was also 

acknowledgement that, when stablecoins are tied to a specific fiat currency “they have utility as tools for improving transaction speeds and recordkeeping.”

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WHAT IS THE LEGAL TREATMENT OF STABLECOINS:

 The determination regarding the nature of a 

stablecoin for regulatory purposes is likely 

highly facts and circumstances dependent. Key 

considerations are the nature of the stablecoin 

and the collateral (if any) backing it as well as 

redemption rights associated with the 

stablecoin. The treatment of stablecoins may be 

very different outside the US.

 A stablecoin is likely to assume the regulatory 

outcome of a referenced underlying asset (e.g., 

a stablecoin based on derivatives is likely to be 

considered a derivative itself).

 In the US:

o Any fiat currency stablecoin or commodity-backed 

stablecoin 100% backed by the referenced fiat currency 

or commodity and that serves as a currency substitute 

may be considered a payment instrument under state 

money transmitter laws particularly if there are full 

redemption rights. If the stablecoin is redeemable for 

currency, the issuer of the stablecoin would likely have 

to register with FinCEN as a money service business 

and seek licenses from the various state money 

transmitter regulators as a payment instrument issuer. 

Exchangers of stablecoins will likely also have to 

register with FinCen as an MSB and with states as 

money transmitters.

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WHAT IS THE LEGAL TREATMENT OF STABLECOINS:

o A stablecoin backed 100% by its referenced 

fiat currency or commodity is likely not a 

security, although its potential status as a 

security is heavily dependent on the details 

of its structure and marketing.

o The issuer of a stablecoin backed by 

precious metals or other commodities may 

be subject to state law requirements related 

to commodities dealers (which 

requirements may be separate from payment 

instrument regulation under state money 

transmitter laws).

o A stablecoin backed 100% by fiat currency 

or a tangible commodity is likely a 

“commodity” under the Commodity 

Exchange Act, but the CFTC should have no 

day-to-day oversight over such a stablecoin; 

it retains anti-fraud and anti-manipulation 

authority, however.

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WHAT IS THE LEGAL TREATMENT OF STABLECOINS:

o Any fiat currency stablecoin or 

commodity-backed stablecoin not 

satisfying the above criteria may also be 

considered a security, in addition to 

being considered a payment instrument 

and/or subject to other possible laws.

o A stablecoin backed by a basket of 

assets and/or actively managed to 

achieve a stable price may implicate 

securities laws.

 Outside the US:

o Stablecoins may be considered derivatives as 

well as securities, in addition to being subject 

to e-money regulations (e.g., EU). The key is 

how the stablecoin is structured and 

marketed.

o Switzerland’s financial regulator recently issued 

initial guidance on stablecoin treatment under 

Swiss law.

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CONTACT DETAILS AND NOTES

Gary DeWaal

Special Counsel

Chair, Financial Markets and Regulatory

Katten

Katten Muchin Rosenman LLP

gary.dewaal@katten.com

All written materials are Gary’s, are based on public 

information and do not necessarily reflect the views of 

Katten’s clients, or individual partners or employees. 

Gary’s views do not constitute legal advice and are 

subject to change. 

Lee A. Schneider

General Counsel

Block.one

lee.schneider@block.one

All written materials are based on public information 

and do not necessarily reflect the views of Block.one. 

Lee’s views do not constitute legal advice and are 

subject to change. 

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