Navigating Stablecoin Launches: To Issue Directly or Partner Up?

Introduction

In the evolving landscape of cryptocurrency, a payment services firm is contemplating the launch of its own dollar-backed stablecoin for merchants. Before selecting an appropriate blockchain platform or setting transaction fees, it must answer a pivotal question: who will be liable for the dollar backing when a merchant redeems 100,000 tokens?

Regulatory Considerations

If the company aims to fulfill this obligation itself, it should consider the requirements to become a licensed issuer of payment stablecoins in accordance with the U.S. GENIUS Act. The definition outlined in the Act emphasizes the issuer's responsibility to redeem or repurchase tokens at a consistent dollar value, which necessitates applicable regulatory approval.

To obtain federal recognition, a qualified fintech that is not a bank can approach the Office of the Comptroller of the Currency (OCC) for permissions to operate as a federally approved issuer. Meanwhile, an uninsured national bank or federal branch can also seek OCC endorsement, albeit through a different regulatory path. Institutions with insurance must apply to their primary federal regulator to issue stablecoins, leveraging subsidiaries to manage compliance.

New entities face unique challenges; as of November 10, 2023, the OCC is currently not accepting issuer applications and has set a start date for prior approval requirements to commence on January 18, 2027. Existing issuers with incomplete applications by this date will be treated differently compared to newcomers.

State-Level Supervision

Alternatively, firms measuring less than $10 billion in outstanding tokens might choose state-level supervision that closely mirrors federal protocols. Such a business must confirm both its eligibility and the nuances of its home state’s regulatory criteria. If an issuer exceeds the threshold, a shift to federal oversight must occur within a one-year period unless an exemption is secured.

Operational Considerations

Regardless of the chosen route, firms need to ensure robust reserves are in place to support token redemptions, with a one-to-one ratio for outstanding tokens. They require accessible cash for users who wish to convert tokens back into dollars and must maintain accurate reconciliation records. Opting for direct issuance may prove advantageous if maintaining operational control is critical, especially during instances of redemption volatility.

In a white-label model, the fintech would manage customer-facing interfaces, while the actual token issuance and redemption obligations would rest with another designated issuer. The recent regulation established by the OCC does not limit issuers to one brand, but mandates clear disclosures about token redemption and reserve compositions, particularly when different brands are involved.

Partnership and Compliance

Before proceeding with any partnership, firms should diligently vet potential collaborators by confirming their regulatory standing and operational plans post January deadlines. It is also crucial to clarify the minting process within contractual agreements, ensuring there are well-defined protocols regarding what constitutes settled funds before minting tokens.

In practice, if a merchant initiates a $100,000 transaction but the funds are not confirmed by the issuer's bank, queries arise as to whether tokens can still be minted. Agreements must delineate verification responsibilities and minting authorizations.

Moreover, it’s essential to develop protocols for scenarios where tokens have been issued without confirmed funding or in cases of transaction failures. Responsibilities regarding compliance, customer interactions, and transaction discrepancies must be clearly assigned, ensuring that both parties understand the allocation of potential liabilities and operational duties. Planning for an exit strategy when partnerships dissolve is vital, particularly when addressing the future of outstanding tokens.

Conclusion

A fintech does not necessarily need to launch a branded token; integrating existing stablecoins might suffice when the goal is efficient settlement without accruing new redemption responsibilities. Likewise, outsourcing reserve management remains feasible under the OCC’s regulation, with continued oversight and liquidity management obligations retained by the issuer.

Ultimately, companies deliberating between direct issuing or establishing a partnership should conduct thorough due diligence, assessing the operational flow and authority respective to minting and redeeming tokens. Kelman Law can provide insights and guidance to navigate these complex regulatory landscapes effectively.