Q1 | Torys QuarterlyWinter 2024

Emerging trends in stablecoins: 2023 and beyond

Hear from prominent industry experts on the state of play and what’s next for the sector in our feature Q&As from Nick Cafaro of Polymesh and Mark Connors of 3iQ.

After a turbulent 2022 for crypto assets and the broader crypto world, 2023 saw no shortage of enforcement actions and warnings by regulators relating to the issuance and trading of crypto assets. Against the backdrop of the Luna network collapse and the FTX insolvency in 2022, 2023 witnessed a renewed focus on the crypto industry by regulators worldwide. Some of the notable developments from last year include high-profile SEC enforcement actions against brokers and crypto firms (over 700 actions by SEC Enforcement Staff in 2023)1, a landmark $4.3 billion settlement by Binance, the world’s largest crypto exchange, with the U.S. Department of Justice2, and regular alerts warning investors to be wary of investing in crypto.

However, as public and regulatory attention was focused on tightening the regulatory framework associated with the sale and trade of crypto assets, other applications in the crypto ecosystem, namely ones relating to fintech (i.e., stablecoins), have been quietly moving ahead and making substantial progress. In this article, we will consider the development and proliferation of stablecoins as a method of payment and settlement. We also look at investments into fintech solutions and applications to develop solutions that unleash the efficiencies and opportunities digital bearer payment instruments (such as stablecoins) present within our financial system and capital markets.

The rise, fall and recovery of stablecoins

Generally speaking, stablecoins are crypto assets that are designed to maintain a stable value over time by referencing the value of a fiat currency (or any other value or right) and are primarily used as a payment instrument to facilitate the trading, borrowing and lending of other crypto assets. The crash in 2022 of terraUSD (an algorithmic stablecoin that was supposed to maintain a peg to USD) and other instances in 2023 involving fiat-backed stablecoins that lost their “peg” to their underlying fiat currency showed the crypto community and regulators alike that, in certain situations, stablecoins are neither as stable nor as risk-free as the fiat currencies to which they are purportedly pegged.

Despite the setbacks in 2022 and early 2023, stablecoins continue to be the dominant means for transacting within Web3. The industry has been watching the evolution of digital bearer payment instruments that are programmable and integrate into the payment layer of applications to support commercial transactions and internal settlements.

The use of stablecoins by industry players

On August 7, 2023, PayPal launched its USD stablecoin for its users to reduce friction for in-experience payments in virtual environments, facilitate fast transfers of value, conduct international payments and enable direct flows to developers and creators3. Soon after, on September 5, 2023, Visa expanded its stablecoin settlement capabilities using stablecoins, such as Circle’s USD stablecoin (USDC), and global blockchain networks, like Solana and Ethereum, to speed up settlement times for their merchants. By leveraging stablecoins and global blockchains, Visa seeks to improve the speed of cross-border settlement and enable its merchant clients to easily send or receive funds from Visa’s treasury4. Other examples include J.P. Morgan and their Onyx blockchain for the exchange of value, information and digital assets5 and Société Générale through the launch of its own blockchain stablecoin6. The embrace of stablecoins and blockchain technology to streamline payments, settlement and transfers of digital assets, whether by PayPal, Visa or other well-established financial intermediaries, reflects an increasing appetite of established financial industry participants to deploy stablecoins and blockchain technology in their internal and customer-facing operations.

A truly digital payment instrument, such as stablecoins, is still novel. These bearer digital instruments introduce features that can only exist in the digital world, such as programmability, automation and real-time data collection.

We would be remiss not to mention that, on November 1, 2023, PayPal received a subpoena from the U.S. SEC requesting documentation about its USD stablecoin7. No further updates are publicly available on the status of the U.S. SEC investigation and its impact on PayPal’s stablecoin. However, this highlights the need for a well-defined regulatory environment to enable the development and use of such digital payment instruments.

Stablecoins regulatory environment

While the U.S. SEC and U.S. legislators have yet to publish a regulatory framework applicable to stablecoins, north of the border, the Canadian Securities Administrators (the CSA) have taken up the challenge and released staff notices in February 20238 and October 20239 clarifying the CSA’s approach to regulating stablecoins (referred to by the CSA as “value-referenced crypto assets”). In short, according to the CSA, whether a particular stablecoin is a security and/or a derivative will depend on the specific facts and circumstances of the stablecoin. However, CSA staff are of the view that fiat-backed stablecoins generally meet the definition of security and/or derivative, and the CSA would consider stablecoins backed by assets other than fiat currency (such as gold or other crypto assets) to also be a security and/or derivative. In Staff Notice 21-333, the CSA published its interim approach for fiat-backed stablecoins, providing the terms and conditions applicable to issuers of fiat-backed stablecoins and Canadian registered crypto trading platforms to offer such stablecoins to their clients.

Outside of North America, in Europe, the Markets in Crypto-assets Regulation (MiCA) is set to be implemented in the spring of 2024. MiCA aims to create an EU regulatory framework, consisting of registration, disclosure and filing requirements, for the issuance of, intermediating and dealing in crypto assets, which include certain types of stablecoins.

While an overview of the global regulatory environment for stablecoins is beyond the scope of this article, readers should be aware that there are efforts worldwide to develop frameworks to support the issuance and transfer of stablecoins. It is important for such regulatory frameworks to be universally compatible for stablecoins to deliver the promise of higher speed, lower cost, secure and reliable cross-border transfers and settlements, as well as the ability to connect Web3 experiences with traditional finance.

Fertile grounds for new technology solutions

While being able to transact digitally using credit cards and electronic money transfers is now entrenched in financial services technologies, a truly digital payment instrument, such as stablecoins, is still novel. These bearer digital instruments introduce features that can only exist in the digital world, such as programmability, automation and real-time data collection. This provides a fertile environment for the development of technology solutions, ranging from digital wallets, decentralized applications, forensics analysis and AML compliance tools to analytics tools that provide deep insights due to the digital nature of the instruments. Such insights can provide detailed analysis at an individual level or on an aggregated level based on various metrics into how money is spent and its movement through our economic system like never before. Current technologies are just beginning to scratch the proverbial surface of what is possible.

Crypto 2024 outlook

While public and regulatory focus continues to be on regulating the issuance and trading of crypto assets, the applications of crypto technologies in the financial services and financial technologies sectors continue to quietly expand and receive funding. We expect this trend to accelerate in 2024 in response to increased institutional interest in such instruments and the benefits they provide. While conversations speculating about the price of Bitcoin and ETH may still be a staple at any crypto party for the foreseeable future, such conversations will increasingly be accompanied by talk of technologies to support virtual currencies, including stablecoins and the potential they offer. 

  1. Bloomberg. “SEC Touts $5 Billion in Penalties After Year of Crypto Dragnet”. November 14, 2023. (https://www.bloomberg.com/news/articles/2023-11-14/sec-touts-5-billion-in-penalties-after-year-of-crypto-dragnet)
  2. Reuters. “Binance’s Zhao pleads guilty, steps down to settle US illicit finance probe”. November 21, 2023. https://www.reuters.com/markets/us/us-authorities-set-unveil-settlement-with-binance-source-2023-11-21/
  3. Press Release. “Visa Expands Stablecoin Settlement Capabilities to Merchant Acquirers”. November 5, 2023. https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.19881.html.
  4. Financial Times, “Société Générale to become first big bank to list a stablecoin”. December 6, 2023. https://www.ft.com/content/cd733a7c-2e74-412f-b234-6f495c118cc6.
  5. CoinDesk. “PayPal Faces SEC Subpoena Over its PYUSD Stablecoin”. November 2, 2023 (updated November 6, 2023). https://www.coindesk.com/policy/2023/11/02/us-sec-subpoenas-paypal-about-usd-stablecoin-company-says/
  6. CSA Staff Notice 21-332, “Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection”. February 22, 2023.
  7. CSA Staff Notice 21-333, “Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients”. October 5, 2023.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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