Are stablecoins money’s WhatsApp moment? [newsletter]

Editor’s note: This post originally appeared in our newsletter — a guide to trending topics in crypto with insights and resources from engineers, researchers, and others on the a16z crypto team. Subscribe to see it in your inbox every other week.

Stablecoins: Payments without intermediaries

The internet made information free and global. So why is it still so hard — and expensive — to move money? Stablecoins, cryptocurrencies pegged to stable assets like the U.S. dollar, are a way to bring the internet’s original vision to money.

Blockchains are the internet’s native financial layer. They combine the composability of public protocols with the economic strength of private enterprise. They’re credibly neutral, auditable, and programmable. Add stablecoins on top, and you get something we’ve never really had before: open money infrastructure.

Think of it like a public highway system: Private companies can still build the vehicles, the businesses, the roadside attractions. But the roads themselves are neutral and open for everyone.

Blockchain networks and stablecoins are not just a means to lower fees; they’re enabling new categories of software:

• Programmatic payments between machines: Imagine AI agent-powered marketplaces automatically brokering deals for computer resources and other services.
• Micropayments for media, music, and AI contributions: Imagine setting a budget with some simple rules and leaving it to “smart” wallets to disburse the payments.
• Transparent payouts with full audit trails: Imagine using these systems to track spending in government.
• Global commerce without a mess of intermediaries: It’s already possible to settle international transactions instantly at negligible cost.

See how or read more about stablecoins

The SEC’s guidance on stablecoins

Miles Jennings

The Securities and Exchange Commission released guidance on stablecoins — clearly identifying where they fall outside the scope of securities laws. While the guidance mostly focuses on centrally issued stablecoins, there are some implications for decentralized stablecoins. In particular:

• The SEC Howey and Reves analysis can easily apply to decentralized stablecoins. This means that where decentralized stablecoins aren’t marketed as investments and otherwise meet the criteria outlined in the guidance, they should similarly fall outside the bounds of securities laws.
• The SEC emphasizes the potential for interest payments to turn stablecoins from a consumer product into an investment product under both the Howey and Reves tests. This makes sense, particularly in the context of centrally issued and controlled stablecoins.
• This doesn’t mean decentralized stablecoins that pay interest are automatically securities. Most decentralized stablecoins that pay interest don’t depend upon the “entrepreneurial or managerial efforts of others” to generate the yield to pay interest — everything is handled via decentralized smart contracts that aren’t controlled by anyone. As such, they do not satisfy Howey.
• Decentralized stablecoins that pay interest also shouldn’t satisfy Reves, where there is no issuer “raising money for the general use of a business enterprise or to finance substantial investments” and where reserves are “adequately funded to fully satisfy redemptions on demand.” Further, a lack of control over the smart contracts and reserves that underpin the stablecoin (i.e., “decentralization”) substantially reduces the risks associated with the stablecoin.

Given all of this, it’s possible that the SEC believes truly decentralized stablecoins don’t trigger securities laws, even where they pay interest.

The guidance is broadly consistent with the GENIUS and STABLE bills moving through Congress — both bills prohibit payment of interest to ensure stablecoins are not investment products, which justifies the exclusion from securities laws for stablecoins included in both bills.

DOJ shifts digital assets prosecution priorities and resources; what’s left to be done

Michele Korver

In other news from Washington, the Department of Justice issued a memorandum on ending “the regulatory weaponization against digital assets.” Setting out the Department’s new priorities, the Deputy Attorney General writes, “The Justice Department will no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets while President Trump’s actual regulators do this work outside the punitive criminal justice framework. … [T]he Department’s investigations and prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors, or those who use digital assets in furtherance of criminal offenses such as terrorism, narcotics and human trafficking, organized crime, hacking, and cartel and gang financing.”

For broader context, it’s not out of the ordinary for leadership to shift prosecution and resource priorities at the change of administrations. But, it is rare to disband a whole unit, as this memo does, ending the National Cryptocurrency Enforcement Team (NCET) and requiring a unit within the DOJ’s Fraud Section to cease crypto enforcement entirely. Many of the novel crypto prosecutions and investigations, however, were brought by U.S. Attorney’s offices, which the memo tasks with leading going forward, with assistance from the HQ-based Computer Crime and Intellectual Property Section. To be clear, DOJ guidance sets department-wide policy and priorities; it does not change the law.

What the DOJ’s memo does accomplish is to require more careful consideration and provide less discretion when investigating and charging cases involving regulatory violations in the digital asset space, stating quite clearly, “The Department of Justice is not a digital assets regulator.”

What are the key takeaways?

• Prosecutors should take action involving illicit financing against the individuals and enterprises engaged in the activity themselves and not pursue actions against the platforms used.
• The memo specifically restricts prosecutions for regulatory violations, including the registration prongs of 18 U.S.C. § 1960 (unlicensed money transmission), Bank Secrecy Act violations, unregistered securities offering and broker-dealer violations, and Commodity Exchange Act registration failures.
• Such regulatory offenses should only be charged where there is evidence of a knowing and willful violation, acknowledging the regulatory uncertainty present during the prior administration.
• Prosecutors should also not charge SEC 33 or 34 Act violations that require the DOJ to litigate whether a digital asset is a security or a commodity and where there are adequate other criminal statutes available to use, such as mail or wire fraud.
• The DOJ’s Offices of Legal Policy and Legislative Affairs have been directed to evaluate and propose statutory and regulatory changes to improve recovery and forfeiture efforts for digital asset investor victims.

But the DOJ has retained some powerful tools in its arsenal to assist in combating priority cases involving cartels, terrorists, and sanctioned nation states such as North Korea and Iran. To this end, the memo has specifically carved out an exception for charging the so-called “third prong” of §1960, sometimes referred to as “money laundering lite.” This third prong prohibits an individual from knowingly conducting, controlling, managing, supervising, directing, or owning all or part of an unlicensed money transmitting business that involves the transportation or transmission of funds that are known to the charged person to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity. Because this subsection has a lower knowledge, or “scienter,” requirement than a money laundering charge, it could still expose individuals and blockchain businesses to liability when cartels, terrorists, or sanctioned funds are involved. And given recent actions against developers, there is still uncertainty about who is classified as a money transmitter under this statute.

What’s on the road ahead?

Whether this memo will force dismissal of any pending prosecutions is unclear. Some who are under investigation, but not yet charged with regulatory-type offenses, may see those investigations paused or closed. Regardless, legislation to amend §1960 is still needed. In addition, updated FinCEN guidance and statutory changes to Title 31 clarifying that non-custodial software providers are not money transmitters would give blockchain developers needed certainty that their projects do not subject them to potential criminal (or regulatory) liability.

Nothing in this memo insulates developers or companies from criminal (or civil) liability for sanctions violations or for laundering funds. Indeed, given the administration’s priorities of aggressively pursuing violations involving fentanyl trafficking, Hamas terrorist financing, and North Korean hacks, the industry should continue to mitigate illicit finance risks where possible. But, the Department’s statement that it will “no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations” should give all some breathing room to build.

Congestion pricing? Economics, theory, reality

with Michael Ostrovsky, Scott Duke Kominers, and Robert Hackett

Everyone hates traffic. One way to reduce it is through congestion pricing, which New York City implemented at the start of the year — the first program of its kind in the U.S.

In this episode of ‘web3 with a16z’, we cover the history of the approach; the challenges of putting it into practice; and the implications of congestion pricing as it relates to mechanism design — which extend from city blocks to blockchains.

Our guest expert is Michael Ostrovsky, professor of economics at Stanford University — who has conducted research in effective and equitable congestion pricing, carpooling, commuter welfare, and the economics of self-driving cars — including proposing modifications to the New York City congestion pricing scheme. He’s joined by a16z crypto Research Partner Scott Kominers, who is a Professor of Business Administration at Harvard Business School and also advises companies on marketplace and incentive design.

— a16z crypto editorial team

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