Stellar Foundation Head ‘Still Bullish’ on US Stablecoin Law in 2023

The assets for one of Franklin Templeton’s key digital asset products, which is an open-ended US mutual fund using the Stellar blockchain, are increasing. As a result, the CEO of the Stellar Development Foundation is now focusing on the regulatory direction of the cryptocurrency industry.

Franklin Templeton’s OnChain U.S. Government Money Fund, which trades on the Nasdaq under the ticker (FOBXX) eclipsed the $270 million mark in terms of assets under management this week. The vehicle, meanwhile, became available for direct investment on the Stellar blockchain via an application managed by Franklin Templeton, the Benji Investments app.

According to representatives of the traditional finance banking giant, the growth of the fund reflects a wider trend of institutional investment in blockchain-focused vehicles within the crypto industry.

In an interview with Blockworks, Stellar Development Foundation CEO Denelle Dixon said healthy investor appetite for the liquid FOXBB vehicle is one indicator that Wall Street and crypto native investors alike are continuing to pay attention to digital asset plays.

The foundation, which operates as a nonprofit in the Stellar ecosystem, has put its own capital into the fund under the partnership. Franklin Templeton oversees its investment processes.

The firm has chipped in about $20 million of its own capital, according to Dixon. That amount added up to a “significant chunk” for her foundation to contribute, she said.

“We love the product, because it’s actually leveraging the best of what the network has to offer,” she said. “And what I mean by that is that it’s an asset issuance. It’s a user who is an asset issuer [that] really looked into the compliance piece and [has gone through] all of the efforts with the SEC to demonstrate why an asset like this on Stellar makes sense.”

Stellar’s role in Washington, industry

A number of additional fund structures have tapped the Stellar blockchain in a bid to power their products, including strategies managed by WisdomTree.

The sentiment comes as crypto markets continue to stabilize off of their 2022 lows, where the prices and volumes of a number of significant industry crypto assets plummeted.

The company claimed that Franklin Templeton’s mutual fund — which launched in 2021 — is the first such vehicle approved by US regulators that used “a public blockchain to process transactions and record share ownership.”

Its liquid strategy of deriving yield from a basket of low risk US government securities taps the Stellar blockchain (XLM) to rebalance its assets on-chain.

“Blockchains like Stellar’s are important to the investment process of the future, and assets built on blockchain rails…will eventually be interoperable with the rest of the digital asset ecosystem,” said Roger Bayston, head of digital assets at Franklin Templeton, in a statement on Monday.

The blockchain’s founder Jed McCaleb is believed to be one of crypto’s on-chain billionaires.

McCaleb started Stellar after moving on from his involvement in the Ripple blockchain’s ecosystem, which runs on its native XRP token and has been long enmeshed in its own regulatory struggles.

The fund comes with associated high costs of operation on a relative basis, clocking in with a gross expense ratio of 8.76% and a net expense ratio of 0.2%, according to the most recently available Franklin Templeton data.

High gross expense ratios are generally associated with lower net returns for investors — reflecting one baked-in cost of putting institutional capital to work in strategies that attempt to marry traditional and digital assets.

And institutional investors as a general rule tend to be more savvy than their retail counterparts in terms of negotiating fee discounts via separately managed account vehicles.

Stellar Foundation’s head US regulatory outlook

In 2023, both the SEC and the CFTC have conducted regulatory investigations into various top cryptocurrency companies that have dealings in the US. As a result, the industry’s perspective has shifted towards anticipating the enforcement actions that may be taken in the coming months.

Dixon said she had “a bit of an epiphany” two or so weeks ago, she “thought about our industry versus the traditional [finance] industry, where there’s trillions of trillions of dollars.”

The Stellar Development Foundation has a number of relationships on Capitol Hill in Washington, DC, as well as with state financial regulators throughout the US, she said.

The digital asset sector, broadly speaking, she said, could stand to “actually all pay attention” to the CFTC’s role in shaping the industry’s path forward in the US this year.

Dixon, who said she recently met with CFTC Chair Rostin Behnam in DC, believes the financial regulator’s role is “really important” when it comes to getting the industry to “that layer of naturalization that’s going to make it so that it can go mainstream.”

“You need to have those rules of the road, and we’re not going to get them by what we have today,” she said, adding that a big missing piece in terms of US industry regulation is when it comes to the intersection of regulated commodities and digital assets.

Cryptocurrencies tied to the Stellar blockchain ecosystem have been employed in humanitarian efforts around the globe, including last year in a bid to supply aid to Ukrainian refugees.

Its native XLM token has faced industry concerns of being overly centralized, while its proponents say the blockchain via its support of the stablecoin USDC acts as a means to facilitate instantaneous transactions across borders — with relatively low fees.

“The one miss” in the US now when it comes to the oversight of the industry is the intersection between crypto assets and commodities, she said.

Registered physical commodities — like oil and corn, for example — and the derivatives that are tied to those underlying assets fall under the CFTC’s regulatory purview.

Multiple efforts at the US federal level to establish stablecoin legislation this year have designated the CFTC as their preferred conduit to execute that oversight.

If a stablecoin bill passes into US law, that is. A growing number of US politicians on both sides of the aisle have voiced their discontent with the state of affairs when it comes to stablecoin oversight between the SEC and CFTC.

“I would love to see that legislation,” Dixon said. “I think this year, we need to at least see stablecoin legislation. I’m still bullish on the fact that by now, lots of people think that’s crazy, but I’m still bullish on it.”

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