In other words, a stablecoin is not allowed to earn interest. In other jurisdictions – including much of Europe – e-money regulations state that e-money cannot earn interest without mentioning who pays the interest. While some stablecoin issuers don’t directly offer interest, they promote and facilitate access to third parties that do. In some regions, e-money regulations state that the e-money issuer cannot pay interest, and given stablecoin issuers generally do not, this is not a problem (eg. Roughly a third of the entire USDC stablecoin balance is sitting on deposit with just two DeFi lending protocols. Earning (good) interest on stablecoins is a hugely popular decentralized finance (DeFi) application and there are even bigger centralized players. Most e-money regulations ban interest payments as the price for not imposing onerous banking rules. E-money issuers are regulated in terms of functionality, but stablecoin issuers don’t know how their stablecoin might be used.Ĭontrast that with PayPal, which decides precisely which features can be offered. The smart contract could be a trading system, a solution to earn interest or one that lets the stablecoin be lent to someone else.Īll of these use cases already happen, and this is where the legal definition of e-money and stablecoins diverge.
The computer code might add programmable features to use the stablecoin for conditional or regular payments. Without authorization from a stablecoin issuer, any developer can create a smart contract that uses that stablecoin. That means stablecoins can earn interest, which is often forbidden for e-money. The most fundamental difference between conventional e-money and stablecoins is the composability feature of blockchains. This openness and ability to trade do not conflict with most e-money legislation, but the next point does. The figures in the graphic paint part of that story. With the greater network effects of stablecoins, regulators are concerned about the magnitude of a big tech stablecoin, because they know it can grow very rapidly. In some countries such as China and Sweden, one or two conventional e-money providers have become the dominant retail payment mechanisms. But the more open it is, the greater the network effects. Most payment systems, including e-money, demonstrate network effects. There’s another side effect of the openness of stablecoins. But even those walls are being broken down. The only walls are the blockchain on which the stablecoin operates. With a stablecoin, I can freely switch to another stablecoin, albeit I need to pay the gas transaction costs. They tried to keep users within their walled version of the internet rather than providing unfettered access to the broader web. In the early days of the internet, there were two big internet access providers, Compuserve and AOL. Currently, they can only be sold via PayPal or used to pay a merchant. But those cryptocurrencies are also held within that walled garden. Sure, PayPal now supports cryptocurrencies. This demonstrates that most e-money operates within walled gardens, which by definition means there’s a limited ability to trade with other forms of e-money or other assets. It’s easy to assume the reason for the friction is that foreign exchange is one of PayPal’s business models.
And I want to because compared to other e-money firms, PayPal charges a small fortune for converting between currencies. But it’s pretty hard to transfer money directly to or from another e-money provider. Yes, I can transfer money to my bank account.
The blockchain is open, smart contracts are composable and the tokens are tradeable.Īs a PayPal user, I’m regularly frustrated by the experience. Stablecoins inherit several features native to a public blockchain. In comparing conventional e-money to public blockchain stablecoins, PayPal is used as an e-money example. Perhaps blockchain is one of those technologies. While the best drafted legislation attempts to be technology agnostic, sometimes a technology comes along that expands what was previously imagined. Typical examples of conventional e-money include PayPal and prepaid debit cards. Here the stablecoin focus is on 1-to-1 fiat-backed, such as Tether, USDC and the planned Diem USD. And Europe wants to regulate stablecoins as e-money, which could reduce the current functionality of stablecoins, such as the ability to earn interest. On Twitter earlier this month, Finnish central banker Aleksi Grym asked the excellent question, “Is there any difference between stablecoins and e-money?”Į-money is a legal concept in many jurisdictions such as Europe and Singapore, but not in the United States.