With regulatory pressure on cryptocurrency and cryptocurrency being way too volatile for people to use it as payment, the undeniable pressure is to create cryptofiat.

The world’s most popular cryptofiat is USDt. A cryptographic token that represents the USD itself. Presumably, every USDt in circulation is physically backed by USD stored in actual bank accounts. 2 bank accounts specifically, as stated in their document released to the internet.

However, USDt suffers from tremendous bad press and there are nagging suspicions that not all the USDt are backed by actual USD in any of the 2 bank accounts.

While USDt fate is still undecided and may not be the best representation of cryptofiat, we believe that cryptofiat would be here to stay. We have to understand the legal considerations of cryptofiat to see how it can best secure a blockchain setup specifically a cryptographic exchange.

Cryptofiat is a form of Cryptoassets – We have to distinguish that crypofiat by itself is a separate cryptoasset distinct from fiat. In the example above, 1 USD is used to purchase 1 USDt, but make no mistake 1 USD is not 1 USDt.

The legal repercussions are as follows;

Entities receiving fiat and issuing cryptofiat are not receiving deposits. In numerous countries, if an entity receives deposits it is by default subject to regulatory pressures. Basically whether there is sufficient care and concern whether the depositor’s monies are carefully protected and taken care of. Even granting that entities may be willing to provide the highest level of protection for the funds, regulation often restricts the amount that deposits that an entity can collect and manage.

Entities receiving fiat and issuing crypofiat in return are effectively selling their cryptofiat for the respective fiat. For example, if you hand over USD 1.00 to an issuer of USDt, you are effectively buying that 1 USDt with your 1 USD. The legal principle is that in a sale of inventory, issuer’s obligation is totally fulfilled when the digital inventory – the cryptofiat – is delivered to the wallet account.

That means that this money received for the purpose issuing the cryptofiat is a revenue in the books – regulatory actions have little control over what companies do with their revenue.

One may of course argue that USDt has a promise that when one intend to monetise the USDt back to USD, thus making the USD for the purchase of the initial USDt to be a deposit and not revenue. This is of course the misunderstanding on the highest degree. Even granting that USDt has an inherent promise that one can monetise USDt back to USD it just means that the revenue collected has a contingent liability – a liability that becomes a liability upon the triggering of an event – in this case, an owner of USDt token selling the tokens back to the USDt issuer to attempt to monetise the USDt tokens back to USD fiat. Most importantly, this does not change the fact that it is a revenue.

Again, one may argue that this is just merely a paperwork exercise meant to mask the true nature of the “deposit”. However, USDt charges a fee upon sellback to the issuer in an attempt to withdraw the USDt in USD. The withdrawal would have a withdrawal fee usually priced at 1% of the amount of USDt in question. This sets the basis of the profit motive behind a business. The 1% administrative fee is charged on the basis that USD in the form of a cryptoasset USDt.

The USDt in circulation as of 10 Sept 2018 is 2.7b USD. The estimated withdrawal fee is about USD 27,000,000. A not too shabby service revenue from issuing USDt. Not to mention as a result of storing USD 2.7b in a bank account, the banks may issue fixed deposit interest on that balance, which would enlarge the revenue income even further.

For providing that cryptofiat the business interest is immense for an issuer of cryptofiat.

There is another gigantic interest from cryptofiat, and it is in its segregated role from the exchange that uses them. USDt for example is used with Bitfinex but at the same time it is used in big exchanges like Binance. USDt absolves the exchanges the need to receive fiat, and thus in the process escape the regulation for regulation often has to deal with fiat and not in cryptofiat.

American Fincen for example, deals with money and anything that can be cross exchangeable for money. Which I would cover more in the next article.

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