With the declining price of volatile cryptocurrencies like Bitcoin and Ethereum, investors are now looking at stablecoins. Providing price stability by maintaining collaterals, stablecoins are found to be a more useful medium of exchange. Facilitating everyday transactions and cross-border payments, these traditional currencies-pegged coins are showing exponential growth, bringing regulatory guidelines around them. Aimed at balancing financial stability with consumer protection, different countries have imposed certain regulations on stablecoins. In this article, we’ll discuss the stablecoin regulations in the US, UK, European Union, Australia, and Singapore.
What are Stablecoins?
Stablecoins are cryptocurrencies whose value is pegged to traditional currencies, commodities, or financial instruments in a 1:1 ratio (in most cases). Unlike high-profile coins like Bitcoin, which are difficult to use as an exchange medium for everyday transactions, stablecoins facilitate day-to-day transactions seamlessly.
Combining the promise of stability with the transparency and efficiency of blockchain, stablecoins are transforming into a pillarstone of digital finance. By holding a reserve asset as collateral or utilizing algorithmic formulas, stablecoins control the supply, bringing stability to prices.
Why are Stablecoins Regulated?
Stablecoins are cryptocurrencies developed to minimize volatility while offering the advantages of digital assets. Despite being designed to mitigate the impact of volatility, many stablecoins have experienced market price fluctuations. This is because the stablecoin market has witnessed a significant growth of more than $162 billion in market value, affecting the broader financial landscape.
With the increased market and its potential to create an impact in the global financial system, many countries have scrutinized stablecoins under regulations. Since strict rules will affect innovation and insufficient policies will risk consumer rights, a moderate and balanced approach is taken by most countries on stablecoins.
Stablecoin Regulations in Different Countries Examined
Considering the risks involved in stablecoins and to protect their consumers from associated risks, different countries have applied regulations on stablecoins. Though the regulations vary in principles and strategies across countries, their fundamental goal is to bring innovation without affecting consumer protection.
1. United States (USA)
Since the stablecoin market is gaining strong momentum, and most of the stablecoins are pegged to US dollars, the need for stablecoin regulation is accepted by both the ruling and opposition of the US government. With the increasing adoption of digital currencies, the importance of strengthening the US dollar has increased, which was supported by many private sectors that contributed to the stability of the US financial system.
As the US regulatory system involves different states, the rules vary across states and there is no unified regulatory framework on stablecoins. At the federal level, stablecoins are considered as convertible virtual currency (CVC) by the Financial Crimes Enforcement Network (FinCEN), thus, regulations on stablecoins are obligated under the Bank Secrecy Act.
Though money transmission laws apply to stablecoin-related activities across the country, states like New York provide specific regulatory guidelines tailored to stablecoins.
In 2021, the Office of the Comptroller of the Currency (OCC) issued interpretive letters, allowing national banks to issue stablecoins, provided they are backed with reserves and comply with necessary laws. In addition, it permitted banks to offer stablecoin custody services, allowing them to hold reserve assets on behalf of issuers. By issuing stablecoin as a payment option, OCC aims to bring fast and interoperable transactions between stablecoins and traditional banking systems.
2. European Union (EU)
The European Union follows a harmonized regulatory framework for stablecoins. The EU Market in Crypto Asset Regulation (MiCA), which was introduced in June 2023 to increase the safety and transparency of digital assets in the country, included a provision for stablecoins that came into effect on June 2024. The regulation included stances on licensing requirements for custodians, consumer protection, and clauses to prevent market abuse.
Under the MiCA regulation, stablecoins are classified into electronic money tokens (EMTs) and asset-referenced tokens (ARTs).
EMTs are fiat-backed coins, designed to maintain a stable value in alignment with a single currency. Considered similar to electronic money, issuers have to obtain authorization as an electronic money institution (EMI) or a credit institution for redemption.
ARTs are backed by multiple assets, such as different fiat currencies, commodities, and financial instruments, thus, they require strong monitoring. Issuers of ARTs require authorisation from their national competent authority unless they are authorized as a credit institution. ARTS must give holders redemption rights, allowing them to redeem tokens as needed.
3. United Kingdom (UK)
In November 2023, the UK financial regulatory authorities, which included the Bank of England, the Financial Conduct Authority (FCA), and the Prudential Regulation Authority (PRA), introduced a proposal for a comprehensive regulatory framework for digital assets in the country.
In its first phase, the proposal addressed fiat-backed stablecoins, leaving commodity-backed and algorithmic stablecoins for phase 2. According to the proposed framework, any institution issuing or offering custodial services for stablecoins in the UK must get certification from the FCA, which requires following strict regulatory standards such as maintaining robust governance controls, sorting out client assets, and maintaining client records. Also, issuers have to back stablecoins with liquid reserves to enable instant redemption for users. Offering interest on stablecoins is strictly prohibited.
The framework categorizes stablecoins into two types: hybrid and pure.
Hybrid transactions require stablecoin for entering or exiting transactions, while pure transactions are facilitated on-chain and require only one stablecoin. Both transactions are subject to some clauses of the Payment Service Regulations, ensuring stablecoin transactions offer protection to transactions similar to traditional transaction systems.
In addition, the UK is finding ways to regulate foreign stablecoins that participate in the UK system, with the existing proposal that UK firms apply regulations for foreign stablecoins similar to the country’s own stablecoins.
4. Singapore
In August 2023, the Monetary Authority of Singapore (MAS) introduced a regulatory framework for stablecoins that are either pegged to the Singapore dollar or any G10 currencies. Under the framework, issuers have to strictly evaluate the reliability and authenticity of the coins before issuing them.
As a part of ensuring stability, the reserve asset backing the single currency stablecoin should meet strict criteria regarding its composition, value, audits, etc. To facilitate seamless resumption and to reduce the risk of insolvency, issuers have to hold a minimum base capital and necessary liquid assets. Holders must receive their redemption within 5 business days of making a request. In addition, issuers are required to provide disclosure to users that detail the mechanisms utilized to stabilize value, the rights of holders, and the audit results of the reserved assets.
5. Australia
Australia’s Treasury department has released a policy paper detailing the plans to integrate digital asset services into existing financial laws. The paper details the new regulatory plans of Australia to bring new opportunities for digital assets while maintaining market integrity and consumer protection.
As part of the proposed reforms, stablecoins, treated as store values, will be subject to oversight similar to that of traditional fiat payment systems. Trading or dealing with stablecoins on secondary markets will not be considered financial dealing automatically. The new regulatory framework is expected to roll out in 2025.
Bottom Line
Stablecoin market is gaining significant momentum, with its increased adoption and potential to affect the broader finance system, different countries have imposed regulations on stablecoins. Though the stablecoin regulations vary in different countries, there are some common principles that every regulation abides by, such as requiring a license for stablecoin issuance, liquidity and stability in reserves, and payment services that must align with existing financial regulations. It is important to know these regulations while dealing with stablecoins so that you can interact with them securely and safely.