Stablecoins for litigators
A quick introduction to stablecoins for litigators
Stablecoins are tricky because they sound like dollars and cents but they act like cryptocurrency. Litigators should know what stablecoins are and how they are different from traditional money to avoid pitfalls.
A stablecoin is a cryptocurrency whose value is fixed to another asset, usually US dollar. Other cryptocurrencies like bitcoin and ether (the cryptocurrency of Ethereum) fluctuate wildly. Everyone heard about their ups and downs, and cryptocurrency price charts look like sine waves from school textbooks. Stablecoins give their users price stability, which makes them useful as a medium of exchange.
Stablecoins still have all four unique properties of crypto: negotiability, copy protection, programmability, and irreversibility. US or Canadian dollars have the first two properties but not the last two. Stablecoins add programmability and irreversibility to regular money, and this is their raison d'ĂȘtre. So when someone wants to move out of bitcoin in a period of market turbulence, he can sell the bitcoin through an exchange and wait for it to deposit the US dollar proceeds into his bank account, or he can exchange the bitcoin for a stablecoin nearly instantly, taking advantage of the programmability and irreversibility of stablecoins. Of course, this user will have to trust the stablecoin to maintain its peg to the US dollar. When he wants to cash out of crypto completely, he should be able to sell the stablecoin for US dollars at a 1:1 rate. This is the promise of stablecoins.
There are two ways for stablecoins to deliver on this promise. Their issuer can maintain a USD (or another stable asset) collateral equal to or greater than the amount of the stablecoin in circulation and exchange the stablecoin for the collateral on demand. This is a collateralized stablecoin. Examples are Tether, TrueUSD, and USD Coin. Or the stablecoin can use its programmability property to maintain its own value relative to an asset of choice such as USD automatically. An algorithmic stablecoin can do so by having its smart contract exchange the stablecoin for a managed cryptocurrency that sits between the stablecoin and the target stable asset. Examples are TerraUSD (failed in 2022) and Magic Internet Money.
Substantive legal issues with stablecoins as with anything else fall under the categories of contracts, torts, restitution and statutory rights and regulation. For example, a stablecoin issuer can be liable for breach of contract if it fails to redeem a stablecoin for the target asset such as USD. Whether the issuer can contract out of this through terms of service is questionable as the right of such redemption is the primary rationale for acquiring the stablecoin in the first place. In algorithmic stablecoins, the issuer could be software so there might be no privity of contract or even standing to sue anyone in tort. Smart contracts and the blockchains on which they run can be completely autonomous with no one being able to alter the course of their execution. Of course, governments and legislatures can also pass laws that create new rights or regulate stablecoins as they may closely resemble financial institutions or payment processors. The irreversibility property of autonomous algorithmic stablecoins can get in the way of such regulation as well.
Procedurally, stablecoins raise several issues. For example, in an action for damages denominated in units of a stablecoin, the plaintiff must pay attention to any statute that prescribes currency in which judgments of the superior court may be expressed. In Ontario, s. 121(1) of the Courts of Justice Act requires orders for payment of money to be expressed in Canadian dollars. If the plaintiff prefers an order compelling payment in cryptocurrency for any reason, he should consider getting an injunction. But that raises equitable issues, not present in ordinary actions for damages.
Evidence is another issue in actions related to stablecoins. Proving stablecoin transactions can be easier because of automatic records in blockchain explorers but explaining this evidence to the court may require an expert witness.
Freezing orders or Mareva injunctions related to stablecoins are different from such orders related to bank deposit money. With stablecoins there are no financial institutions on which the plaintiff can serve a freezing order to facilitate compliance. The plaintiff is left alone with the defendant to enforce the freezing order either through voluntary compliance or through search and seizure of cryptocurrency wallets by way of an Anton Piller motion or a similar proceeding.
Finally, lawyers should be careful about accepting stablecoins as retainers. Their local regulators may require that all trust funds be deposited with an approved financial institution. This is not usually possible with stablecoins.
Stablecoins may look like dollars, sound like dollars, and change hands like dollars but they are not dollars, either substantively or procedurally.