The Weekly Peg (3/3): Jack Ma says ‘I told you so’

What a week last week was, eh? Here’s our final catch-up, before we go through it all again for you on Friday.

Token 2049 hangover:

— Colin Butler, co-founder of Mega Matrix, presented the case for holding stablecoin governance tokens to generate yields with. The video of the presentation is now up online.

Key summary: Mega Matrix wants to create a new digital asset strategy to give institutional investors exposure to stablecoins, beyond Circle, which is the only real option today. They plan to do this by listing a first-of-its-kind basket of stablecoin governance tokens, including Ethena, Hyperliquid, and STBL, to provide the public investors with a yield-generating investment option tied to the revenue of these protocols, contrasting it with the traditional buy-and-hold Bitcoin approach.

Unlike structures like Tether, where proceeds from stablecoin issuance are retained by the issuer, stablecoins with governance tokens allow holders of the governance tokens to acquire a right to the revenue generated by the underlying protocol. For example, in the case of Ethena, accumulating its governance token provides a call on its revenue.

Industry news:

— Deutsche Börse and Circle announced a collaboration to advance stablecoin adoption in Europe (via Circle press release)

Key graf: “This first-of-its-kind agreement in Europe aims to deliver new solutions for market participants by connecting token-based payment networks with traditional financial market infrastructure. It also marks a key step in advancing the regulated adoption of stablecoins across European markets.”

— Societe Generale’s crypto arm said it was bringing euro and dollar stables to DeFi via Ethereum (via Cryptonews)

Yield wars:

— Stripe CEO Patrick Collison responded to Nic Carter’s post about how the stablecoin duopoly was ending, saying issuers will have to share yields.

Key graf: “Everyone is going to have to share yield. Today, the average interest on US savings deposits is 0.40% (FDIC data), and $4T of US bank deposits earn 0% interest.* Things aren’t better in the EU: 0.25% average interest on non-corporate deposits; corporate deposits just 0.51%.** In my view, this is going to change: depositors are going to (and should!) earn something closer to a market return on their capital. (Some lobbies are currently pushing, post-GENIUS, to further restrict any kinds of rewards associated with stablecoin deposits. The business imperative here is clear — cheap deposits are great — but being so consumer hostile feels to me like a losing position.)”

— Coinbase CEO Brian Armstrong also hit back at banks trying to constrain stablecoins from offering rewards.

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Economic statecraft:

— Conflux got the green light to trial offshore yuan stablecoins as China eases crypto stance (via South China Morning Post)

Key grafs: “Conflux Network, which claims to be the only regulatory-compliant public blockchain operator in mainland China, has been allowed to experiment with offshore yuan stablecoins as Beijing seeks to secure a position in the new global financial order, according to its founder.

Conflux had received a tacit green light from Chinese authorities to explore the development of offshore yuan stablecoins, and was aiming to have up to 300 million yuan (US$42.1 million) worth of tokens issued on its blockchain by the end of this year, its founder Fan Long said in an interview on Tuesday.”

— The firms of Sheikh Tahnoon bin Zayed (brother of UAE President) are pushing a massive stablecoin project, reports Semafor.

Key grafs: “Subsidiaries of International Holding Co. (IHC), the $240 billion conglomerate chaired by Sheikh Tahnoon, will integrate the ADI Chain and stablecoin into their operations, potentially reaching millions of users outside traditional financial systems. A “major payments provider” in Africa will be the first partner, ADI Foundation CEO Andrey Lazorenko, who is overseeing the project, told Semafor. He declined to name the payments processor in Africa.”

Insight: Semafor says Tahnoon is apparently tapping three entities he chairs, including UAE sovereign wealth fund ADQ, the UAE’s largest lender First Abu Dhabi Bank, and IHC. The stablecoin will be dirham-pegged, but the UAE’s currency is also already pegged to the U.S. dollar.

— Brazil has captured one-third of LATAM’s $1.5T crypto market, with 90 percent of that stablecoins, Chainalyis data shows.

Central banks:

BoE stablecoin limit backlash!

— Bloomberg reported on Tuesday that the BoE plans to grant exemptions to proposed limits on stablecoin holdings by businesses after an industry backlash to the move.

Key graf: “The UK central bank intends to grant waivers to certain firms, such as crypto exchanges that need to hold large amounts of stablecoins, according to a person familiar with the matter. The BOE will also allow firms to use stablecoins as a settlement asset in its experimental Digital Securities Sandbox, people familiar with the matter said — another sign that Governor Andrew Bailey’s previously skeptical viewpoint is moderating. The BOE declined to comment.”

Cash Equivalence Take: The move comes after industry players lashed out at the Bank for imposing terms that they claimed would make the sector commercially unviable in the U.K. They are also unhappy about the prospect of having to hold all their assets in unremunerated bank reserves at the central bank.

Agant is a UK-based fintech aspiring to launch a GBP stablecoin once the regulatory regime becomes clear. Agant’s chief legal officer, Tom Rhodes, told us that “Across the industry, there is a very strong consensus that requiring U.K. issuers to hold unremunerated central bank reserves would make the Bank’s regime commercially unviable, particularly in the context of emerging stablecoin regimes in other major jurisdictions.”

Rhodes also warned that not budging on this issue could risk the entire sector fleeing offshore. “Issuers would be heavily disincentivised to issue in the UK, and would either seek to issue from other jurisdictions or avoid the UK altogether,” he said.

Providers believe sticking to the standard model, where stablecoins are backed by high-quality and liquid assets, would be just as safe, especially if they were given access to lender-of-last-resort facilities. “Given a stablecoin issuer’s holdings of HQLA, it will have no shortage of the high-quality collateral needed for participation in a liquidity facility,” Rhodes said.

There are, however, more signs the mood is shifting at the BoE: “We understand the Bank is slowly opening up to the idea of other high-quality backing assets, more aligned with the FCA proposals,” Rhodes said.

Jack Ma says, “I told you so”: How the Bank proceeds will send a strong signal to markets regarding the U.K.’s openness to business and innovation. Arguably, the worst outcome would be emulating the People’s Bank of China in 2019. This is when the PBOC famously forced the country’s dominant digital payment providers, WeChat and Alipay, to start holding 100 percent of customer reserves at the central bank, without being able to collect interest.

The move prompted Alipay boss, Jack Ma, in October 2020, to publicly criticize the Chinese government for stifling financial innovation, noting: “To make risk-free innovation is to stifle innovation, and there is no risk-free innovation in this world. Oftentimes, managing risk down to zero is the biggest risk.” Soon after, Ma disappeared from public view, and Alipay’s much-touted IPO was suspended by government intervention.

— The New York Fed provided a historical perspective on stablecoins (via Liberty Street Economics)

Key grafs: “Stablecoins may feel novel but, conceptually, they echo an earlier era of U.S. financial history. From 1863 to 1935, “national bank notes” circulated widely as a form of private money that was backed by public debt. Authorized by the National Banking Acts of 1863 and 1864, these notes were issued by national banks, which were commercial banks chartered under federal law.

How did note issuance by national banks work? A bank could apply for a national bank charter by the Office of the Comptroller of the Currency if it fulfilled a set of requirements such as having a minimum amount of capital. Once the bank was granted a national bank charter, it could use its capital to purchase government bonds. To print notes, the bank then had to deposit with the Treasury U.S. government bonds that were eligible for note issuance. National bank notes were redeemable in lawful money such as specie (coin) or greenbacks (paper money issued by the Treasury directly).”

— Yannis Stournaras, governor of the Bank of Greece, on new tech, crypto, stablecoins, and payments (via speech).

Analysts:

— JP Morgan said on Tuesday in a note stablecoins could generate $1.4 trillion in demand for US dollars by 2027 (via Reuters) .

Regulation:

— EU finance ministers to discuss potential ban, new safeguards on global stablecoins, says Politico.

Summary: According to Politico Europe, the European Central Bank will urge EU finance ministers to ban crypto firms like Circle from issuing stablecoins simultaneously in the EU and abroad. The European Systemic Risk Board fears multi-issuance could let firms exploit EU rules in crises, threatening eurozone stability. Alternatives include assessing foreign safeguards and promoting international oversight by 2026. The Commission argues current rules suffice, but U.S. firms dominate the market and Washington favors looser crypto regulation. The nonbinding recommendations, first reported by Bloomberg, are confidential until October 24.

— EU considers boosting euro stablecoins to counter Trump’s crypto push, also via Politico.

Summary: The EU is weighing whether to promote euro-denominated stablecoins to counter U.S. President Donald Trump’s push to expand dollar dominance via crypto. A Commission note warns that dollar stablecoins already dominate 99 percent of the market. Ministers will debate if the bloc should actively support euro stablecoins or rely on U.S. issuers, potentially reopening the MiCA framework. Here’s the doc.

— The Blockchain Association is fighting efforts by banks to rewrite the Genius Act.

Key graf: “Big banks are dusting off a predictable playbook using the ‘loophole’ trope whenever there is competition, claiming that stablecoins will drain deposits, shrink credit, and cause banks to stop paying interest. These arguments are not just misleading – they are backwards. Indeed, ironically, the same mega banks that caused the 2008 crisis have since captured trillions of dollars in deposits, dramatically increasing their market dominance at the expense of smaller banks. Stablecoins are not a threat to consumers or credit markets. They are a threat to incumbents and an outdated system.”

— The Digital Euro Association’s open source “Markets in Crypto-Assets Regulation (MiCAR) Tracker” is now covering stablecoins.

Digital euro:

— There’s a fatal flaw in the design of the digital euro, academics warn (via Politico)

Summary: Europe’s deal on digital euro holding limits may be legally flawed despite political success. Scholar Mark Dawson warns the ECB could still override any ceiling to fulfill its price stability mandate, raising doubts about its independence limits. While officials welcome progress, legal ambiguity could let future ECB councils bypass restrictions, echoing past debates on “helicopter money” and sovereign debt distortions.

Deep thoughts:

— Law professor claims Congress has increased the chances of government bailouts by opening the floodgates for “stablecoins” (via Project Syndicate).

Key graf: “But it would be wrong to view America’s new crypto laws as examples of shrewd innovation measures or wise geopolitical policies. On the contrary, these bills are advancing at a time when the US is gutting public funding for scientific and technological research, raising serious doubts about the country’s commitment to innovation. Moreover, the dollar’s dominance rests on political and economic foundations, not the currency’s technological plumbing, and the administration’s trade policy and attacks on central-bank independence may end up threatening those foundations.”