Dai or Die: Why the Taxonomy of Crypto Matters

With a market capitalization of nearly $7.5 billion, Maker’s Dai token is the 12th largest cryptocurrency overall, and the fourth largest stablecoin behind Tether’s USDT, Circle’s USD Coin, and Binance USD.

But if the cryptocurrency regulation promise a pair of US senators introduced in June – the “Responsible Financial Innovation Act” – ends up being signed into law, Dai will not be a “payment stable coin”.

See also: The Senate’s crypto bill debuts, and the crypto industry reaps big gains

So what? Well, when it comes to the taxonomy of financial assets, including digital assets like cryptocurrencies and stablecoins, a rose by any other name might not be a flower.

And by the way the bill defines a payment stablecoin, Dai may not even be legal in the US anymore.

That’s because “stable coins” are defined as digital assets that are:

A) redeemable, on demand, on a one-to-one basis for instruments denominated in US dollars;

B) Defined as legal tender under [U.S. law] or under the laws of a foreign country (excluding digital assets);

C) Issued by a business entity;

D) accompanied by a statement by the issuer that the asset is redeemable … from the issuer or another identified person;

E) Backed by one or more financial assets (excluding other digital assets), in accordance with subsection A; and

F) Intended to be used as a medium of exchange.

However, Dai is backed by other digital assets – among them Ether and USD Coin – which are locked into a smart contract that uses them as collateral to maintain Dai’s one-to-one link to the US dollar.

Related: DeFi series: What is an algorithmic stable coin? DAI and Fiat-Free Dollar Peg

In other words, it is an algorithmically stable coin. Not unlike TerraUSD, the algorithmic stablecoin that wiped $48 billion out of the cryptoeconomy when it and the partner token it used to maintain its link, LUNA, collapsed after a week-long run in May.

Read more: $45B Stablecoin Rout Confirms Worst Fears About Crypto’s Need for Reserves

What it won’t be, if you notice sections A and E, is a payment stablecoin.

They, the bill states, must be issued by “a depository institution [which] shall maintain high quality liquid assets … equal to not less than 100 percent of the face amount of the institution’s liabilities on stable coins issued by the institution.”

CASP or VASP?

It may or may not happen this year, but soon enough, the US will follow the EU, which has finalized the terms of its comprehensive Markets in Crypto-Assets (MiCA) regulatory framework bill and is expected to pass it into law. soon.

MiCA defines a “crypto-asset” as a “digital representation of value or rights that can be transferred and stored electronically, using distributed ledger technology or similar technology.”

Which is not so different from how the Financial Action Task Force (FATF), an international body responsible for setting financial regulations, defines a “virtual asset”, which is a “digital representation of value that can be traded or transferred digitally and can be used for payment or investment purposes.”

Again, so what? Well, MiCA’s definition of a “crypto-active service provider,” or CASP, is different from FATF’s “virtual asset provider,” or VASP.

MiCA’s CASP definition is broader than FATF’s VASP, according to anti-money laundering provider Sygna. The company said this is “to ensure MiCA applies to most crypto companies and to future-proof it against market niches that don’t exist yet.”

The fact is that being a VASP comes with many legal and due diligence requirements and responsibilities. Where do CASPs fall? And who will find out the hard way?

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