The Fungibility Problem with Multi-Jurisdictional Stablecoins

Many countries are introducing stablecoin laws, each with their own requirements, especially regarding reserves. If the same stablecoin brand is issued in multiple jurisdictions using the same brand, is it fungible (or entirely interchangeable)? There’s the practical fungibility versus the legal one, especially if a stablecoin collapses.

Highlights:

While the biggest use case for stablecoins is currently for cryptocurrency transactions, there’s a growing appreciation of their benefits for cross border payments. Plus, the infrastructure to support this is expanding, with Stripe’s acquisition of Bridge being one of many examples. After passing the $200 billion issuance mark in December 2024, many predict it won’t be long before stablecoins reach the trillion mark. Citi recently estimated a base case of $1.6 trillion by 2030, with a bullish estimate of $3.7 trillion.

Defining fungibility

The definition of ‘fungible’ according to the Oxford Dictionary:

“Of a product or commodity that has been contracted for: that can be replaced by another identical item without breaking the terms of the contract. More generally: interchangeable, replaceable.”

What’s notable about this definition is that stablecoins issued in different jurisdictions will likely have separate contracts.

The core fungibility issue arises because a resident of one jurisdiction might receive a payment that involves a token that’s technically issued in another jurisdiction. In the examples we’re discussing, these are the same brand of tokens.

Technically, EU crypto exchanges may be breaking the rules

Imagine a global stablecoin, let’s call it GlobalCoin, issued in two jurisdictions e.g. Japan and EU each meeting local requirements. Clifford Chance partner, Diego Ballon Ossio, highlighted that this is potentially problematic in the EU. He noted that, “technically the EU issuer or exchange should have something in place to avoid the Japanese version of that coin to be listed, exchanged, and traded in the EU. Because it’s not exactly the same coin, particularly if say liquidity requirements differ.”

He gave the example of someone from Japan paying an EU resident with GlobalCoin via an EU cryptocurrency exchange. From the user’s perspective, a GlobalCoin is a GlobalCoin, they can’t differentiate where it was issued.

Mr Ballon Ossio continued, “If that coin was used in an exchange, that exchange is now admitting to trading a coin that technically hasn't been approved because the Japanese version wasn’t approved. And actually you would not be allowed to offer that coin because that coin is being sold as an e-money token, but it's actually been issued by a non-EU issuer.”

The EU’s MICA regulations don’t deal with this situation. There’s a pragmatic approach involving the issuers rebalancing the books between the jurisdictions, which isn't perfect. It will work 99.99% of the time, but will be tricky in a de-peg event.

USDC is the first prominent example

The most prominent example of a stablecoin that's issued in multiple jurisdictions is Circle’s USDC, which is primarily issued in the United States. While this article references USDC a few times, the content and issues are not specific to Circle or USDC.

Circle has EU emoney and MiCAR licenses and issues USDC in France, which meets European rules. The EU version of USDC has a separate issuer, different terms (i.e. a separate contract) and ringfenced reserves. For example, all EU USDC stablecoin holders can directly redeem the stablecoin with Circle SAS, provided they go through KYC and compliance procedures. In the US, only larger entities and distributors (primary participants) can redeem directly. The UK has changed its planned approach and now intends to allow redemption only via primary participants.

Jurisdictions have different reserve requirements

Looking at its reserves, in the United States the USDC stablecoin keeps around 15% of its reserves in bank deposits, according to Circle’s transparency reports. USDC temporarily lost its dollar peg when Silicon Valley Bank collapsed in 2023, and the institution held $3.3 billion of USDC reserves. Before that, Circle kept around a quarter of its reserves at banks. Even 15% is more than most stablecoin issuers, in part because holders of other stablecoins often switch to USDC to off ramp. For example, Tether only keeps around 0.1% at banks.

Turning to EU’s MiCAR, it requires smaller coins to keep 30% of their reserves in cash, and larger ones 60%. The regulations attempt to address the risks by limiting the amount that can be held by a single bank.

Another example is Japan, which currently requires 100% of stablecoin reserves to be held in bank accounts, although it’s exploring changing the rules to support government bonds.

In the case of Circle,