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Abstract

New market practices and business models are emerging around so-called stablecoins, a type of crypto asset with certain features that seek to stabilize the price of the coin. Stablecoins have the potential to offer a borderless and more accessible way to pay, addressing many shortcomings in existing payment systems around the world. Yet, these developments also raise fundamental legal issues. What questions should lawyers and financial advisors be asking to ensure risks are adequately addressed? What answers can stablecoin innovators give to financial authorities and industry stakeholders to provide comfort that there is a sound legal basis for the business models and market practices around their coin? U.S. commercial law, which is chiefly designed to support financial market activities, contains powerful principles that can usefully serve as building blocks for a foundational legal framework to uniquely advance a stablecoin’s economic purpose as a medium of exchange — allowing technologists to move fast, but safely. This Article spells out how to build such a legal basis by leveraging the core commercial law principles of (i) focusing on the principles of settlement finality, (ii) rules for adverse claims, (iii) discharge of the underlying obligation, and (iv) the concept of a security entitlement. It maps out how these principles are embodied under the U.S. commercial laws of investment securities (UCC Article 8) and of payments (UCC Articles 3, 4, and 4A). The goal in doing so is to show how innovators can incorporate novel, technology-driven market practices and business models into the existing financial law framework in a proven and effective way — how to leverage what is working today and does not need to be invented again. Awareness of the availability of these commercial law tools, and their limitations, can provide important help to stablecoin developers and market participants in managing their exposure, designing efficient financial innovations, and controlling the risk to the broader financial market.

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