"Knowledge sharing session" by BOT, Speaker for "Stablecoin and Legal Issues" (4 Oct 2019)

1. Komkrit Kietduriyakul
Partner, Baker McKenzie
Stablecoin and Legal Issues
4 October 2019
Kullarat Phongsathaporn
Partner, Baker McKenzie

2. Overview

3. ?
Investors
Blockchain platforms in Thailand
CMDF
Securities
Exchange
Commission
eHealth
(Ministry
of Public
Health)
National
Digital ID
Blockchain
Community
Initiative
National
Digital
Energy
Platform
Stock
Exchange of
Thailand
Can Stablecoin
help?
Who to issue?
National
Digital
Trade
Platform
Importers and
Exporters
National Single Window
ProposedDLT
for capital market
Issuers
Investors
Other market players
Businesses
Energy sector
Beneficiaries
Digital Government
Services
Healthcare providers
Patients
Private sector
Public
Government Services
Banks
Shipping and Logistics
Insurance providers
Banks
Intermediaries
Public

4. Categorization of Stablecoins
Collateral
Algorithm
Off-Chain
On-Chain
Fiat
Commodity
Bank Issued
3rd Party
Issued
(Bank Deposit Backed)
“Bank-coin”
“Trust-coin”
“Commodity -
coin”
“Crypto-coin”
“Algo-coin”
Or combination of backed assets

5. Backed assets
Assets
(economic concept of value + legal concept of property)
Intangible
Tangible
Real Financial
Movable Fixed Not
Securities
Securities
Patents,
trademarks,
loyalty
points/rewards
franchise
agreements,
domain
names,
mortgage
servicing
rights,
other IP,
brand rights
Commodities (oil,
corn, etc.),
gold (as a
commodity)
wine, art, cars,
machinery,
diamonds & rare
gems, ivory
Currency, gold (as
investment), bitcoin,
digital fiat currency,
some insurance
products, non-
securities based
swaps, non-securitized
receivables, forward
contracts, other OTC-
traded derivatives
Real estate
(buildings,
land,
airspace,
subsoil
rights), trees
Stocks, bonds, options
contracts on commodities
futures, securities-based
derivative contracts (mostly
options, but can also be
forwards, futures, and swaps
which trade mostly OTC),
some insurance policies
(variable life), mutual fund
shares, ETFs, securitized
receivables
(Securitization Process)

6. Stablecoin Landscape
Issuer Type Collateral (Backed Asset) Use
JPM Coin Fiat-backed Bank reserves For instantaneous payments, currently
being tested in business-to-business
money flows
Tether Fiat-backed Cathay Bank, Hwatai Bank,
others
To facilitate use of fiat currencies in a
digital manner
Trust Token
(True USD)
Fiat-backed US Bank, Alliance Bank,
Mercantile Bank, other
Trading Platform
Paxos
Standard
Fiat-backed FDIC-Insured banks For instantaneous transfer of US dollars
around the world.
GeminiDollar Fiat-backed State Street For instantaneous transfer of US dollars
around the world.
Digix Global
(DGX)
Commodity-
backed
Gold vault at The Safehouse To invest in gold.
Tiberius Commodity-
backed
Warehouse with metals To make technology such as solar
panels and electric cars.
Maker DAO Crypto-backed $150 in ETH: $100 in DAI To decentralize and built using smart
contracts on Ethereum.

7. CBDC Status
CBDC interest?
Not
yet.
US | Japan | Hong Kong
Early stage with draft cryptocurrency
bill that proposes allowing the
government to create a digital rupee.
India
Launched E-krona pilot, procuring
suppliers to develop proposals for
E-krona for non-bank public.
Sweden
Launched e-Peso pilot.
Uruguay
Project Ubin in 2017 and trial with Bank of
Canada experimenting with cross-border
& cross-currency payments using CBDC.
Singapore
Late development stage,
claim to be “almost ready”
China
Financial Times, 23 September 2019

8. Stablecoin applications
• Payments outside
banking system
• Lock in profits
• Price arbitrage
• Tax avoidance
• Speculation
Current uses
• Customer to merchant payment
• Peer to peer remittance
• Automated payment to suppliers, customers,
employees, etc.
• Remittance and international fund transfer
• Inter-bank payments (commercial, retail, etc.)
• Supply chain financing
• Debt payment
• Structured debt
• Interest payment
• Dividend rights
• Investment offering
• Security and equity token purchase and transfer
• Tokenized assets
• Currency exchange transactions
Potential uses

9. 2
Regulations

10. Traditional
securities
offering
STO /
Asset
Tokenization
Existing
securities
To be announced
by the SEC
Regulated Exempted
Digital
Token
Cryptocurrency
Regulated Exempted
Securities
• The Securities and Exchange Act
Positive list of “Securities”
includes:
o treasury bills
o bonds
o bills
o shares
o debentures
o others as specified under
the Securitiesand
Exchange Act
• The EmergencyDecree on the
Specific Purpose Juristic Person for
Securitization
• The Trust for Transactions in
Capital Market
E-money / E-payment
The Payment SystemsAct
Currency
The Currency Act
Digital Assets
The Royal Decree on the Digital
Asset Businesses
Investment
token
Utility
token
Not ready-to-use
Regulated
Ready-to-use
Exempted
Others to be
announced
by the SEC
Asset
Tokenization
Stablecoin and laws
“Electronic Money”
o electronic cards
o a prepayment of funds
(เง
ิ น)
o can be used for the
payment of goods, service,
or others in lieu of cash
“Cryptocurrency”
o electronic dataunit
o being used as a “medium of
exchange” for the acquisition of
goods, services or any other rights,
or the exchange betweendigital
assets
“Digital Token”
o electronic data unit
o dominantof rights, which mightbe
rightsas an investor or rightsto
receive specific goodsor services
“Currency”
o consists of coins and notes
o unit of currency is "Baht“
o is restricted for making,
issuing or putting into
circulation
The Minister of Finance, withthe advice
of the BOT has the power to issue the
notification prescribing the provision of
the payment serviceswhich may affect
financial system or public interest as
regulated paymentservice.
Others: deposits,
derivatives, etc.?

11. The
Currency
Act
Civil and
Commercial
Code
The
Payment
System Act
Securities
and
Exchange
Act
Royal Decree
on the Digital
Asset
Businesses
Exchange
Control
Laws
BOT
regulations
SEC
regulations
Consumer
Protection
Law
Taxation
Law
AML/CTF
Laws
Financial
Businesses
Law
Central
Bank Law
Land Code,
Real Estate
related-laws
Exchange-
traded
product
related laws
Laws related
to specific
types of
underlying
assets
Stablecoin:
Legal Aspects
Main laws for consideration
Related and/or subordinate laws and
regulations for consideration
Laws in relation to each specific type of
industry of the underlying assets
(e.g. real estate, securities, etc.)
Derivatives
Laws
Laws
related to
tech
Trust
law

12. Benefits and challenges
12
Efficiency
transparency
Investment options
and liquidity
Faster clearing
and settlement
Compliance and
Supervision
Cyber threats
BENEFITS
CHALLENGES
Socioeconomic
Impact
Legal and Regulatory
issues

13. How should Stablecoins be regulated?
1. What is the
underlying
asset?
2. Use of the
stable coin?
3. Regulatory
Framework
4. Additional
Functions/
Service channels
Fiat?
Commodity?
Cryptocurrency
? Algo?
Which laws and
regulations are
applicable?
Who are
responsible?
e.g. e-wallet,
regulated
financial activities
(deposits, loans,
remittance,
payment, etc.)
Purpose VS Actual Use
Securities? e-Money?
Means of
Payment/remittance?

14. 3
Real Life
Applications and
Sectoral Players

15. Fiat-Backed Stablecoin
Issuance
(1)
transfers
funds
user custodian
(2)
confirms
receipt
issuer or agent
(3) sends update
maintains
(4)
allocates
stablecoins
smart contract
Transfer
sender
receiver
issuer or agent
DLT network
smart
contract
audits maintains
(1) initiates
transfers
validates
ops.
audits
(2) allocatesstablecoins

16. Fiat-Backed Stablecoin
Redemption
(5)
transfers
funds
user custodian
(4)
instructs
payment
issuer or agent
(3) sends update
maintains
(1)
redeems
stablecoins
smart contract
(2) transfers stablecoins

17. Real-Life Application of Fiat-Backed Stablecoin
PURCHASE
PROCESS
1. User submits wire to
trust company with crypto
wallet information
3. Corresponding
TrueUSD coins
are sent to user’s
crypto wallet
2. The trust
company sends
signal to TrueUSD
smart contract
verifying the
purchase
USER
TRUST COMPANY
TrueUSD
REDEEM
PROCESS
3. Trust company wires
corresponding USD to
the user
1. TrueUSD
coins are burned
by user
2. TrueUSD
smart contract
notifies the
relevant trust
company
USER TRUST COMPANY
TrueUSD

18. Crypto-BackedStablecoin:
The case of MakerDAO/ $DAI
*CDP- collateralized debt position
1 ETH=$100
CDP
CDP
NOTE
CDP is under-
collateralized!
LIQUIDATE!
1 ETH=$75
Your Wallet
1 ETH
Your Wallet
1 CDP
(contains1 ETH)
(Dai owed = 0)
Your Wallet
1 CDP
(contains1 ETH)
(Dai owed = 66)
66 Dai
1 ETH 66 Dai
(Open CDP) (Create Dai)
You You
Your Wallet
You
66 Dai
Much like a “margin call”, the system
has automatically liquidated your CDP
to the highest bidder. While you get to
keep the Dai that you’ve borrowed, the
1 ETH you put into the CDP contract
has been sold to someone else and
used to pay off your debts.
Your Wallet Your Wallet
66 Dai 1 ETH
(Before Auction) (After Auction)
1 ETH
66 Dai

19. Crypto-BackedStablecoin:
The case of MakerDAO/ $DAI
*CDP- collateralized debt position
1 ETH=$100
CDP CDP
NOTE
You can’t close
this CDP until the
66 Dai you
borrow ed is paid
back!
Your Wallet
1 ETH
Your Wallet
1 CDP
(contains1 ETH)
(Dai owed = 0)
Your Wallet
1 CDP
(contains1 ETH)
(Dai owed = 66)
66 Dai
1 ETH 66 Dai
(Open CDP)
(Create Dai)
You You
Your Wallet
1 ETH
66 Dai
(Destroy Dai)
1 ETH
(Close CDP)
Your Wallet
1 CDP
(contains1 ETH)
(Dai owed = 0)
66 Dai
You

20. Commodity-BackedStablecoin:
The case of Digix Gold Tokens
Proof of Asset
Registration
Redemption
Mint
Recast
Gold Asset
Card
Physical Gold
Bar
Digix Gold
Tokens
Product Life Cycle

21. Yes
Yes
Yes
Yes
Yes
Yes
Commodity-BackedStablecoin:
The case of Digix Gold Tokens
Minting Digix Tokens
Minting Process
Start
User sends minting
transaction to Gold Asset
Contract
Minter Contract checks
Gold Asset Registry
Validity
Ownership
Check
Vendor
Check
Custodian
Check
Auditor
Check
Accounting Contract deducts
gold tokens as fee
Has fee?
No
Accounting Contract credits
owner into Gold Token
Ledger
Accounting Contract checks if underlying
asset certificate has outstanding storage
fees since last action
Minter Contract sends new tokens to
Accounting Contract and information about
underlying asset certificate
End Minting
Process
No
No
No
No

22. Algorithm-Backed Stablecoin
Issuance
maintains:
validatesops.
cryptographical vault
Option B (1)
exchange of
assets for
stablecoins
Option A
(1) air-drop
Option B (2)
transfers
crypto assets
Issuance of an algorithmic stablecoin
and contraction of excess supply
user
DLT network
smart contract
Contraction
user
(3) burns
stablecoins
burn address
Option B (1a)
instructs use
of reserves
maintains:
validatesops.
Option A (1)
sellsrightsto
future revenues
(2) sends
stablecoins
cryptographical vault
DLT network
smart contract
Option B (1b)
uses on-chain
reservesto buy
stablecoins

23. Algorithm-Backed Stablecoin:
The case of Libra
อาจถูกกากับตาม
function

24. 4
Liability, Frauds,
Bankruptcy, and
Bank Run

25. Sample regulations
• SEC
• CFTC
• FinCEN
• New York State Department of Financial
Services (NYSDFS), other states
• Office of Foreign Asset Control (OFAC)
USA’s Agencies
Licensing Conditions
Virtual Currency Business Activity License (aka “BitLicense”)
Participant Protection:
• S 200.9 of NYDFS Code: licensed stablecoin issuers must “hold
deposits within a diversified portfolio of cash, virtual currency,
or high-quality, highly liquid, investment-grade assets, in
such proportions are acceptable to the superintendent.”
• Fiat-Backed Stablecoins: Paxos and Gemini
stablecoins must keep their customer deposits in
accounts at US banks which are insured by the
Deposit Guarantee Scheme Directive.
• EU: “e-money providers (e.g. fiat-backed stablecoins), must
keep all customers funds in a segregated account or must
insure the value of those funds.
NYDFS BitLicense
Requirements regarding:
• Compliance
• Capital requirements
• Custody and protectionof customer assets
• Approval before material changes to business
• Maintenance of books and records
• Examination every 2 years
• Submission of reports and financial disclosures
• Having a program for AML and cybersecurity and a BCP plan
• Advertising and marketing restrictions
• Consumer protection
• Complaint policies
• Inspections
Who needs licensing?
Subject to certain exceptions, the following
activities require a BitLicense:
• Virtual currency transmission
• Storing, holding, or maintaining
custody or control of virtual
currency on behalf of others
• Buying and selling virtual
currency as a customer business
• Performing exchange services as a
customer business
• Controlling, administering, or
issuing a virtual currency.

26. Regulations
Investment Banks
Where stablecoins are deemed securities: Banks that operate as brokers or as securities advisory firms
can be subject to FINRA oversight. :
FINRA issued Notice 18-20.
“...to promptly notify it if it, or its associated persons or affiliates, currentlyengages, or intends to engage, in
any activities relating to digital assets, such as cryptocurrencies and other virtual coinsand tokens.”
As a result, banks that participate, change or intend to participate in the cryptocurrency and token markets
should consider whether FINRA notification is appropriate in light of the notice.
Anti-Money Laundering and FinCEN (March 2013 Guidance):
“an administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (b) buys or
sells a convertible virtual currency for any reason is a money transmitter under FinCEN’sregulations…”
If the stablecoinis deemed to be securities:
Developers and exchanges participating in the issuance of tokens would be subject to FinCEN-related
AML/KYC rules and digital token regulations.
The money service business requirements apply equally to domestic and foreign-locatedconvertible virtual
currency money transmitters, even if the foreign located entity has no physical presence in the United States,
as long as it does business in whole or substantial part within the United States.

27. Regulations
Fiduciary Duty
Fiduciary Duty 1 Fiduciary Duty 2
• A trust relationship between the
participants and the operators,
whenever the participants
entrusts the operators to effect a
transfer by updating the ledger.
• Escrow/Custodial relationship:
This fiduciary duty could require
deposit-holders and issuers to
maintain a stable cryptocurrency
value
An alternative to compulsory or controlled deposit-holding may be for the
courts or regulators to recognize that a fiduciary duty exists between the
blockchain payment systems and their participants.
Repercussion: Licensed issuers must maintain a 1:1 ratio of assets to issued
stablecoins and must hold participants’ deposits on trust and as fiduciaries.
Example: In the US, Issuers are fidiuciaries if they are incorporated as a trust
company so as licensed issuers (licensed trust companies), both Paxos and Gemini
undergo monthly audit rather than simply relying on the promised transparency of the
DLT system itself.

28. Regulations
Risks and Liabilities
Case Study: iFinex (Bitfinexand Tether)
May 2019
• NYAG’s Allegation: iFinexhas “engaged in a cover-up to
hide the apparent loss of $850 million of co-mingled client
and corporate funds.”
Allegations:
• Bitfinex’s poor KYC procedures: requires “little more than an
email address to begin trading virtual currencies.”
• Bitfinex (exchange) lost $850 million and subsequently used
funds from affiliated stablecoin operator Tether to secretly
cover the shortfall.
• Funds from Tether’s reserve were used to make up the
shortfall, but neither the loss nor Tether’s fund movements
were disclosed to customers.
• NYAG also accused iFinex of minting the Tether stablecoins
for Bitfinex to the tune of as much as $900 million, when
Tether is supposed to be pegged at 1:1 USD.
Court order: iFinex directors, officers, principals, agents,
employees, contractors, assignees or any other affiliated
individuals are to cease accessing, loaning or making any other
claim to the dollar reserves held by Tether.
Present: iFinexhad filed and won a motion to not handover the
requested documents. The litigation remains ongoing.
BankruptcyRisk
• Risk of the custodians and the
issuers, going bankrupt or running
away with investor funds.
• Risk of banks which holding the
funds becoming insolvent or
freezing and confiscating the
funds held in the account.
Issues of Insolvency and
Stablecoins
• Ownership Issues (legal ownership
vs beneficial ownership);
• Classification Issues;
• Valuation Issues;
• Other Legal Issues;

29. 29

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