Regulations were lagging behind the rapid development and continual breakthroughs in crypto for a long time. The uncertain regulatory environment slowed down the transition to cryptoassets, but couldn’t stop stablecoins from exponentially growing.
Some of the biggest economies in the world finally started to set regulations to define, understand and frame cryptoassets, bring clarity and safety, and keep up with the speed of transformation. United Kingdom, European Union, and the United States have already laid the groundwork of stablecoins, demonstrating their trust for stablecoins and expectation for its widespread use.
Here’s a snapshot of the latest regulatory status for stablecoins:
In 2019, The Financial Conduct Authority (FCA) published its ‘Guidance on cryptoassets’, describing three broad categories of tokens in relation to how they fit within existing FCA regulation: e-money tokens, security tokens, and unregulated tokens.
The document shows that fiat-pegged stablecoins are most likely to be categorized as e-money tokens, defined as digital payment instruments that store value, can be redeemed at par value, and offer holders a direct claim on the issuer.
A consultation also began with the HM Treasury for cryptoassets, particularly stablecoins. According to the proposal, a firm regulated as an Electronic Money Institution (EMI) can use stablecoins such as USDC without an additional layer of registration as a cryptoasset business.
Summary: An FCA authorized firm as an EMI will be in compliance to use stablecoins such as USDC.
EU is developing Regulation of Markets in Crypto-assets (MiCA) proposals to help regulate out-of-scope cryptoassets and their service providers in the Union.
MiCA aims to provide a single licensing regime across the EU by 2024. Once the regulation is adopted, it will directly apply to all member states and firms seeking to do business in the EU. However, it’s not expected to come into effect before the end of 2023.
Stablecoins like USDC are examined under the ‘e-money token’ category, defined as a type of cryptoasset where the main purpose is to be used as a means of exchange, and that purports to maintain a stable value by referring to the value of a fiat currency. Carrying out activities in issuing tokens and fiat-backed stablecoins is likely to be a ‘crypto-asset service provider’ service.
Summary: Firms regulated as EMIs in the EU can compliantly carry out activity involving stablecoins such as USDC.
The stablecoin market is still largely unregulated in the US; however, the US Treasury Department is discussing potential regulations.
Transactions in stablecoins are currently covered by the definition of ‘money transmission services.’ This means that accepting and transmitting activity denominated in stablecoins makes a firm a money transmitter under the Bank Secrecy Act. In this case, stablecoins have to register as Money Service Businesses (MSB).
The recent discussions around regulating stablecoins apply to issuers like Circle, who applied to become a full-reserve national commercial bank in 2021. Once it’s granted a banking license, it will be subject to government oversight and bank-like regulations. In other words, the USDC issuer Circle is fully compliant with the existing regulations and will further comply with the new ones.
Summary: Firms regulated as an MSB can use stablecoins without any additional layer of registration. MSBs can continue to hold and transfer USDC under their own registrations, dependent on State Level requirements.
Stablecoin assets grew by around 450% to $156 billion in 2021. The market is rapidly evolving, and regulators are forced to keep up with these changes.
The recent regulatory developments show that stablecoins promise the future of money by laying the foundations for a more open, transparent, and inclusive monetary system. However, there’s still a long way to go. Creating innovation-friendly frameworks that don’t impede the application of new technology while addressing the new risks cryptoassets pose and ensuring security will be the main challenge for regulators.
If you are a regulated financial institution and want to know more about how to use stablecoins in your jurisdiction, feel free to reach us by filling the form below.
*The information in this article reflects the regulatory status in stablecoins as of January 2022 and may change in the future.