In the first part of a three-part in-depth interview with top New York corporate attorney Felix Shipkevich, interactive investor cryptocurrency analyst Gary McFarlane finds out what he thinks about the stablecoins being developed by JPMorgan Chase, Wells Fargo and of course Facebook, and the issues they throw, such as compatibility and inventory.
The interview was conducted before news emerged that some Libra partners – Mastercard and PayPal – were reportedly getting cold feet. PayPal has now confirmed to CNBC that it is pulling out of Libra for now. See EWN’s report on Libra and PayPal here.
GM: Wells Fargo has just followed in JPMorgan’s wake by announcing that it too is developing a stablecoin.
So, what do you think will be the main issues it and JPMorgan will face rolling out their stablecoins?
FS: There are two issues that immediately come to mind. JPMorgan Chase and Wells Fargo are in what we would consider the very early stages. I don’t even know if beta is even appropriate at this point. The use of their own token – digital cash – will initially be tested on their own internal framework. For their beta programmes to be successful they would very likely make it available for their participants to use for external payments and cross-border payments for their customers.
So, the first obstacle is, for anyone to use those coins outside of those banks that digital cash has to be accepted by the other financial institutions. There has to be some type of medium that connections transactions between one bank and another.
GM: This goes back really to the whole issue of the interoperability of the various blockchains. So, using totally different frameworks is going to throw up all those sorts of issues, in addition to the legal ramifications.
The stablecoin compatibility problem
FS: Yes. Compatibility is one of the more ignored aspects when it comes to stablecoins. Look, you and I could probably hire a developer to create a Gary Coin or a Felix Coin and we could say hey we can take 1,000 dollars or sterling and peg each one of our coins 1-to-1 to our respective currency.
It doesn’t necessarily mean that our stablecoin will be easily compatible or accepted by others. So that’s obviously the first obstacle, assuming that the entire beta programme is successful.
The second obstacle in my opinion – just by way of background, I worked as a general counsel for a global foreign exchange brokerage – a lot of people are forgetting about inventory when it comes to these types of cryptocurrency payments instruments – in many ways these stablecoin instruments are very close to currency baskets.
Ultimately, they are not necessarily viewed as assets or securities; they are payments instruments. That really is their purpose: to lower the cost of transacting between various individuals, parties and consumers.
When it comes to issuing your own stablecoin you need to have that liquid cash in different currency baskets available.
Otherwise you are issuing a token that is not backed by actual liquid cash and that may be problematic. If it’s backed by say real estate, how quickly can you liquidate real estate if everyone wants to cash out and sell you back that stablecoin?
The inventory obstacle facing Libra and all stablecoins
So, inventory is a very important obstacle. It’s actually the same obstacle that Facebook will ultimately face because in order for you to have somebody use your stablecoin as a cross-border payment instrument you need to have those currency baskets available to back those stablecoins.
GM: But with Facebook, and JP Morgan and Wells Fargo too perhaps, I’d imagine they would have deep enough pockets to be okay on the liquidity front. No?
On the face of it they should have the reserves – not sure about Wells Fargo’s balance sheet but Facebook should.
FS: Sure, except for how do you manage those reserves when, for regulatory reasons, you have to have a certain amount of liquid cash available for your clients?
Imagine if you were a Wells Fargo or JPMorgan customer and you needed to send a wire for a major mergers and acquisition transaction – say for $100 million – and all of a sudden JPMorgan says: “I’m sorry, we need to wait three more days to get a little bit more cash.” Obviously, that would spook a lot of clients.
Maybe $100 million is not a big deal. The question really comes down to if the stablecoins are adopted by the banks – which by the way I think is a fantastic natural technological progression that I welcome – I rarely hear people in the media talking about inventory.
I think if JPMorgan wanted to issue 100 million or even a billion coins pegged to the US dollar that’s not a problem, but can they issue 100 billion? No they can’t. I haven’t actually looked at their financials but I don’t imagine they have $100 billion of cash sitting around.
GM: Does that mean that the likes of Facebook, assuming the regulators get out of the way, which I know is a big assumption, are the sort of entities likely to be more successful [with launching stablecoins] because of their deep pockets, although I’m not sure that even Facebook has $100 billion dollars to chuck at this.
But if they can’t do it, no one can.
Facebook says there won’t be a fixed amount of Libra. Instead, just like how money was originally created, it gets issued as commercial imperative requires.
JP Morgan, or Wells Fargo and their clients could just turn down business that they can’t handle I suppose, or put a limit on how big transactions can be, at least initially as a way to manage their liquidity.
Is that a way forward or does that just highlight the inadequacy, perhaps, of the collateral model?
FS: I imagine in the early stages they would probably have to put some type of threshold or cap in place.
I’ve been following Wells Fargo and JPMorgan’s announcements and you really don’t have a lot of information about what exactly they are doing, no in-depth information.
Part two of this interview in which Felix discusses blockchain technology adoption is available here.
Felix Shipkevich is a principal of Shipkevich PLLC. His practice concentrates on futures, commodities, and derivatives regulatory, transactional, and enforcement matters.
Felix also teaches on the Policy and Business of Cryptocurrencies course at Hofstra University School of Law.
Between 2006-2010, Shipkevich was the general counsel for global FX brokerage, CMS Forex.
Since 2011 he has run his own law firm with a number of associates, practicing US and New York law. He is also a qualified solicitor in England where he has a small London office.