Crypto regulation in the world: weekly digest #111

UAE

The Abu Dhabi Global Market is advancing its regulatory framework for fiat-backed stablecoins, specifically through the introduction of a proposed framework for Fiat-Referenced Tokens (FRT). This initiative is part of the Financial Services Regulatory Authority's ongoing efforts to adapt to the evolving digital asset landscape, such as an emerging use of fiat-backed stablecoins, such as Tether’s USDT and address industry demands.

FRTs are defined as stablecoins that are backed by high-quality, liquid assets, denominated in the same currency as the token. They are designed to function as a means of payment, sharing characteristics with stored value instruments.

The issuance of FRTs will be classified as a new regulated activity, distinct from existing regulations governing stored value. This classification will come with specific conduct of business and prudential requirements to ensure that issuers operate safely and soundly. The FSRA aims to adopt a risk-based and proportionate approach to the issuance of FRTs. This approach is intended to incorporate necessary safeguards, reflecting best practices from leading jurisdictions around the world.

Under the proposed regulations, issuers of fiat-backed stablecoins will be required to:

• Obtain a Financial Services Permission for providing money services.

• Ensure that the fiat tokens are fully backed on a 1:1 basis, with regular reconciliations to verify this backing.

• Comply with existing client money rules and the broader virtual asset framework, which includes technology governance and risk management protocols.

This regulatory initiative comes in the wake of the UAE Central Bank's approval of a framework for stablecoin issuance, particularly for UAE dirham-backed tokens. The establishment of a comprehensive regulatory environment for stablecoins is crucial for positioning the UAE as a leading hub for cryptoasset innovation in the region and globally. By providing clear guidelines, the ADGM aims to foster confidence among market participants and encourage further innovation within the digital economy.

The FSRA has initiated a consultation process, with the consultation paper open for feedback until October 3, 2024. This period allows stakeholders to provide input on the proposed framework, ensuring it meets the needs of the market while maintaining regulatory integrity.

USA

MakerDAO has recently undergone a significant transformation, rebranding itself as Sky and introducing a new stablecoin, USDS, alongside a new governance token, SKY. This shift marks a notable evolution in the Maker ecosystem, particularly in how it differentiates USDS from its predecessor, DAI.

USDS is designed as an upgradable version of the existing DAI stablecoin. Users can convert their DAI holdings into USDS at a 1:1 ratio, facilitating a smooth transition to the new token.

MakerDAO is incentivizing DAI holders to switch to USDS by offering various financial rewards through its new platform, Sky.money. This includes potential yield from liquidity provision within the Sky Protocol, which is similar to the current DAI Savings Rate program.

A significant departure from DAI is the introduction of a remote freeze function for USDS. This allows Maker insiders to freeze USDS tokens if necessary, a feature that aligns with regulatory compliance but contrasts sharply with DAI's previous characterization as a decentralized currency. This capability is expected to provide legal assurances in jurisdictions where such measures are required. While DAI has been positioned as a decentralized stablecoin, USDS aims for mass adoption and regulatory compliance. This shift reflects a strategic pivot to attract a broader user base, potentially at the cost of some decentralization principles that DAI embodied.

The introduction of the SKY governance token replaces MKR, allowing for a new governance dynamic within the Sky ecosystem. Each MKR token can be converted into 24,000 SKY tokens, which are expected to facilitate enhanced user participation and governance.

The launch of USDS represents a strategic shift for MakerDAO as it seeks to balance the ideals of decentralization with the practicalities of regulatory compliance, aiming to position itself favorably in the evolving landscape of digital currencies.

El Salvador

El Salvador adopted Bitcoin as legal tender on September 7, 2021. This historic decision was initiated by President Nayib Bukele, who announced the proposal during the Bitcoin Conference in Miami on June 5, 2021. Following this announcement, the Legislative Assembly voted in favor of the "Bitcoin Law" on June 9, 2021, with a majority of 62 out of 84 deputies supporting the measure. This move made El Salvador the first country in the world to officially recognize Bitcoin as a legal currency, allowing it to be used for transactions alongside the US dollar, which has been the country's primary currency since 2001.

However, in 2024, only 12% of the population used Bitcoin at least once to pay for goods and services, down from 24.4% in 2022. Among those who used Bitcoin, 49.7% made purchases using crypto only one to three times, while 20% used it for 10 transactions or more. The most common Bitcoin transactions were for groceries (22.9%), supermarkets (20.9%), and veterinary clinics (15%). It is remarkable, that only 0.5% of respondents believe Bitcoin has played a role in El Salvador's economic improvement.

El Salvador now holds over $346 million in Bitcoin, with a portfolio of more than 5,853 BTC. The government has invested an estimated $120 million of El Salvador's reserves into Bitcoin, with the true amount potentially much higher. Since March 16, 2024, the country has been purchasing one full Bitcoin every day.

The immediate rollout of Bitcoin created a disconnect between the policy and the people, with the government failing to inform its populace of the change and address spiraling poverty. With nearly all of El Salvador's fiscal capacity invested in Bitcoin, the country depends on its success, which seems unlikely given cryptocurrencies' volatile nature. El Salvador's high fiscal deficit endangers its ability to receive loans from foreign powers, with credit rating agency FitchRatings downgrading the nation to a "CCC+" rating, indicating substantial credit risk with a high possibility of default.

In summary, while El Salvador's Bitcoin adoption has faced challenges and slower-than-expected progress, the government remains committed to its Bitcoin strategy. The long-term benefits and impact of this bold move remain to be seen as the country navigates the complexities of integrating a cryptocurrency into its economy.

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