Do you remember Libra?
More than two years have passed since June 2019, when the Libra Association published its white paper and revealed itself to the world. Libra was the cryptocurrency that, in the intention of its creators, was meant to create a globally accessible payment system based on blockchain technology. To simplify, the purpose of the project was developing a new infrastructure that would facilitate access to payment services. Blockchain technology would implement such system with distributed governance, open access, and security.
Libra was a stablecoin-that is a cryptocurrency that aims to “maintain a stable value relative to a specified asset, or a pool or basket of assets”[1]. Stablecoins are different from other notorious cryptocurrency like Bitcoin in the sense that their value is linked to a pool of highly liquid assets baking the currency, thus reducing it price volatility. It is, in fact, that its superior price stability that allows stablecoins to be used as a reliable means of payment.
Originally, the promoter of the project was the Libra Association, a non-profit organization based in Geneva composed of 28 leading representatives of the fields of payment services, telecommunications, e-commerce, social media and so on[2]. Each member, including Facebook, could have appointed one member to the Association Council, each entitled to one vote. Libra Association should have had its brain in the Association Council, which retained a broad decision-making power over governance and policy, and its right arm in Libra network, the subsidiary directly responsible for operating the Libra payment system.[3] The Association Council should have been vested with broad decision-making power over governance and policy, while Libra Network should have been the subsidiary directly responsible for operating the Libra payment system.
The announcement of Libra wasn’t greeted with open arms by regulators and monetary institutions. On September 16, 2019, a meeting was held in Basel, Switzerland, chaired by Frenchman Benoît Coeuré, a member of the Executive Board of the European Central Bank since 2011. Representatives of the U.S. Federal Reserve, Bank of England and other central banks sited at the table to address the principal concerns raised by the ambitious project[4]. The cold welcoming discouraged some members, and between September and October 2019, partners such as Visa and Mastercard reconsidered their involvement[5]. Consequently, the project was partially redefined, and the dialogue with authorities lead to the “Libra 2.0” stablecoin proposal[6]. The name then changed from Libra to Diem in December 2020[7].
Despite a few steps backwards, Diem is the utmost demonstration of how much an up-to-date and non-ambiguous regulation of cryptocurrencies is needed at a multistate level. The aim of this paper is to provide an overview of the way the new EU proposed regulation would deal with a new “Libra Association” determined to issue stablecoins on the EU market. Since the matter can be addressed from disparate standpoints, we chose to focus on its corporate implications. It shouldn’t be forgotten, however, that every standpoint is always intertwined with the others, and the best approach to the problem is to always maintain a broad multidisciplinary vision.
The answer of the EU: DFP an MICAR
Stablecoins, and cryptocurrencies in general, are a promised land of opportunities, yet they raise several regulatory concerns. Market integrity, e.g., AML/CFT[8] (anti-money laundering / combating the financing of terrorism), and consumer and investor protection have been key issues since stablecoins were first introduced. The “global” nature of a stablecoin like Libra brought such concerns to systemic proportions and evoked the challenges of preserving overall financial stability and monetary policy[9]. The real challenge for regulators is, and will be, providing effective solutions to such concerns and combining them with the valorization of new technologies and their advantages. The EU is now embracing that challenge. The answer is called MiCAR.
MiCAR (Markets in Crypto-Assets Regulation) will govern those legal entities which aim to issue crypto assets on the single market of the EU. As if this wasn’t mind blowing enough, MiCAR is just a brick in the massive wall that the EU is building. This wall is the DFP (“Digital Finance Package”). The DFP 2020 is a maneuver comprehensive of two strategies (a new Digital Finance Strategy and a renewed Retail Payment Strategy) and of three core legislative proposals: DORA (EU’s Digital Operational Resilience Act), aimed at preventing and mitigating cyber threats, DLT Infrastructure Regulation, the Pilot Regime for Market Infrastructure based on DLT, and finally, MiCAR[10]. If MiCAR will enter into force, all legal entities, whether European or not, wishing to issue crypto-assets in the EU, shall comply with rules set forth by this Regulation with respect to authorization, supervision, governance and organizations, asset management, mergers and acquisitions, conduct rules and so on[11].
As we affirmed before, Libra was a stablecoin, i.e. “a cryptocurrency that aims to maintain maintain a stable value relative to a specified asset, or a pool or basket of assets.”[12] MiCAR calls stablecoins “ARTs” (asset-baked tokens) and stablecoins issuers are regulated in its Title II.
We come, therefore, to our quest: to which rules and principles of law should a corporation (or other legal entity) wishing to issue a future “Diem” comply with? And what’s their rationale?
The issuer of ARTs[13]
ARTs are one of the three main categories of tokens addressed by the Regulation, standing beside EMT (e-money tokens) and CA (crypto-assets), the third being a residual category encompassing all crypto products which are neither ARTs or EMTs.[14] Issuers of ARTs must obtain an authorization to access the market, that can be granted or refused by the competent authority of the Member State. The authorization process begins with the issuer’s application and its submission of all necessary information, continues with the assessment of its completeness and the acquisition of the non-binding opinion of the European Authorities, and terminates with the notification of the final decision. Within the informative material, the issuer shall encompass a white-paper outlining the details of the ICO.
Without getting into specifics, we would like to highlight two considerations. First, the authorization is not required for issuers of crypto-assets that do not qualify as AMTs or EMTs, but MiCAR only mandates the publication of the white-paper. That may be read as evidence of majority of the special concerns that stablecoins raise, especially after the Libra experience. Second, another distinguishing factor is that MiCAR requires ARTs issuer a more detailed white-paper. More precisely, Art 17 requires adding a detailed description of the reserve of asset and how it’s managed. thus, we are led to a further consideration that is confirmed by the rest of the regulation: the very heart of ARTs issuers’ regulation is the management of the reserve of asset that backs the stablecoins.
Governance prescriptions and rules of conduct[15]
The issuance of ARTs requires companies to adopt adequate measures of internal organization. The issuer shall adopt internal policies and procedures to ensure, among other things:
· A proper management and custody of the reserve of asset
· The handling of all events in the life of the stablecoins (its creation, destruction, redemption by the holder, validation of transactions, etc.)
· The good repute and competence of managers and owners of more than 20% of the share capital or voting rights.
· The respect of ongoing disclosure requirements
· The prevention of conflicts of interest
· Compliance with the rules of conduct towards the holders of the stablecoins
The main idea is that the issuance of ARTs requires high level of caution and preparation when it comes to internal organization of the corporation. From the management to the auditing, till the relationship with the holder of the stablecoin, the legal entity shall endorse a robust structure, and make it coherent to the specific risks and interests of its activity.
The management of assets: the reserve[16]
The obligation to have a reserve of assets is arguably the core provision of MiCAR with respect to ARTs issuers. The rationale is evident if we consider the peculiarity of a stablecoin. As the name itself suggests, a stablecoin aims to maintain a stable value over time. Such objective is achieved through the presence of a reserve of asset serving as a collateral, just as for a fiat currency. Ensuring the stability of the stablecoin’s value is key, because it stands at the foundation of both the stablecoin’s usability and the holders’ trust, thus justifying significant intrusions in the corporate discretion in managing its own assets.
An issuer shall have a reserve of asset for each distinct ART issued. For each reserve, the issuer shall implement adequate policy for the management of its assets and composition, and an independent audit shall be mandated each six months. In order to prevent conflicts of interest endangering the holders of the stablecoins, the issuer’s control over the reserve is limited: the reserve should be segregated from the issuer’s own assets and held in custody by a credit institution or a CSP (“Crypto-asset Service Provider”).
An example should give concreteness to the matter. The White Paper 2.0 of Libra announced that Libra Network would have had a reserve composed of “high-quality liquid assets[17]” whose amount should be “at least equal to the face value of each Libra Coin in circulation.”[18]The aim of this full-backing is stabilizing the payment system and ensuring people’s trust.
Conclusion
MiCAR and the DFP is surely one step ahead, but the walk has just started. Even if there is room for improving the regulation[19], the need for a robust and coordinated intervention of authorities is felt both at international and state level. In Italy, CONSOB’s commissioner Paolo Ciocca intervention in the House of Representatives mentioned the severe urgency to define the regulatory framework[20]. With regard to stablecoins, in the US the President’s Working Group on Financial Markets issued a report that encourages the Congress to promptly enact a federal legislation on stablecoins.[21]
Providing an exhaustive picture of all the main regulatory concerns raised by cryptocurrency is almost impossible. This article voluntarily fails to address crucial matters such as monetary policy and financial markets integrity implication, the hardships in distinguishing securities crypto-assets from non-security crypto-assets and many other. Our intention was to focus on a corporate perspective, such as that of a stablecoin issuer. For those who are interested, that should be thought as a starting point for a much wider analysis of a matter in which corporate law intertwines with finance, monetary policy, sovereignties, technology and others, with the ultimate goal to create wise solution to crucial concerns raised by extraordinary new opportunities.
[1] FSB, Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements (October 13, 2020) [2] Facebook, Mastercard, PayPal, Visa, Spotify AB, Iliad, Vodaphone Group, Coinbase, Rabbit Capital just to mention some of the more mainstream. [3] See Libra historical whitepaper [4] Chappell, Bill; “Facebook Unveils Libra Cryptocurrency, Sets Launch For 2020”, npr.org, https://www.npr.org/2019/06/18/733701971/facebook-unveils-libra-cryptocurrency-sets-launch-for-2020?t=1636126242634 [5] Light, Joe; Carville, Olivia "Libra Loses a Quarter of Its Members as Booking Holdings Exits"; https://www.bloomberg.com/news/articles/2019-10-14/booking-holdings-is-latest-to-pull-out-of-libra-association [6] See the new version of the White Paper affirming that “Four key changes have been made to address regulatory concerns that deserve specific attention, each of which is addressed briefly below and then in more depth in the updated white paper: 1. Offering single-currency stablecoins in addition to the multi-currency coin. 2. Enhancing the safety of the Libra payment system with a robust compliance framework. 3. Forgoing the future transition to a permissionless system while maintaining its key economic properties. 4. Building strong protections into the design of the Libra Reserve.” [7] Kastrenakes, Jacob; Libra cryptocurrency project changes name to Diem to distance itself from Facebook, https://www.theverge.com/2020/12/1/21755078/libra-diem-name-change-cryptocurrency-facebook [8] For an overview of the relationship between AML regulation and Crypto-assets Service Providers see generally e.g., Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo, FSI Insights on policy implementation: Supervising cryptoassets for anti-money laundering, No. 31 Bank for International Settlement (Apr. 2021) [9] Douglas Arner, Raphael Auer and Jon Frost, Stablecoins: risks, potential and regulation, Bank for Inter. Settl’s. (Nov. 2020) [10] Financial Stability, Financial services and Capital Markets Union, European Commission, “Communication on Digital Finance Package” (24 September 2020) [11] See Art 1 and 2 MiCAR. [12] See supra, note 1. [13] With regard to this section, see Art. 15-21 of MiCAR. [14] It should be noticed that MiCAR scope of application is residual: it applies to all crypto-assets whose characteristics don’t allow to categorize them as “financial instruments” under the MiFID II regime. The weakness of this setup is evident: different sets of rules apply depending on a distinction (that between financial instruments and crypto-assets that are not financial instruments) which is definitely nebulous. [15] With regard to this section, see Art. 23 to 31 MiCAR. [16] With regard to this section, see Art 32-36 MiCAR [17] 20% of which held in cash and 80% in up to three months government securities issued by sovereigns with low credit risk rated A+ by S&P or A1 by Moody’s, or higher. [18] See Historical White Paper. [19] See Dirk A. Zetzsche, Filippo Annunziata, Douglas W. Arner and Ross P. Buckley, The Markets in Crypto-Assets regulation (MiCAR) and the EU digital finance strategy, Capital Markets Law Journal, 2021, Vol. 16, No.2, highlighting some issues of the regulation calling for improvement. [20] Camera dei deputati, 6° commissione permanente, Audizione della Consob, Roma 8 giugno 2021. [21] US Department of Treasure, Press Release: President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins, (Nov. 1, 2021). The report is available at the following link: https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf
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