In previous articles, the Crypto Salad team introduced the stablecoin regulatory frameworks in the United States and Hong Kong from multiple perspectives. In addition to the United States and Hong Kong, many other countries or regions in the world have already formed relatively complete stablecoin regulatory frameworks.
In this article, the Crypto Salad team selected three of the most representative countries or regions with international influence - the European Union, the United Arab Emirates, and Singapore, and used the same analysis framework and thinking logic, combined with the Crypto Salad teams blockchain project experience, to sort out the regulatory frameworks of the stablecoins of the above three countries.
This article will analyze the regulatory framework of stablecoins from the following perspectives: regulatory process, regulatory documents, regulatory authorities, and the core content of the regulatory framework. The specific content framework is as follows:
Table of contents
1. European Union
1. Regulatory process and regulatory documents
2. Corresponding regulatory authorities
3. Main contents of the regulatory framework
a. Definition of Stablecoin
b. Entry threshold for issuers
c. Currency stabilization mechanism and maintenance of reserve assets
d. Compliance requirements in the circulation process
e. Special regulatory rules for important ART
2. United Arab Emirates
1. Regulatory process and regulatory documents
2. Corresponding regulatory authorities
3. Main contents of the regulatory framework
a. Definition of Stablecoin
b. Entry threshold for issuers
c. Currency stabilization mechanism and maintenance of reserve assets
d. Compliance requirements in the circulation process
3. Singapore
1. Regulatory process and regulatory documents
2. Corresponding regulatory authorities
3. Main contents of the regulatory framework
a. Definition of Stablecoin
b. Entry threshold for issuers
c. Currency stabilization mechanism and maintenance of reserve assets
d. Compliance requirements in the circulation process
(The above picture is a comparative diagram of the stablecoin regulatory frameworks of the European Union, the United Arab Emirates, and Singapore, for reference only)
1. European Union
1. Regulatory process and regulatory documents
The European Union officially released the core regulatory document Crypto-Asset Market Regulation Act (hereinafter referred to as MiCA Act) in June 2023. The MiCA Act aims to establish a unified regulatory framework for crypto assets and solve problems such as regulatory fragmentation among member states.
The relevant rules on the issuance of stablecoins in the MiCA Act officially came into effect on June 30, 2024, and all companies subject to these rules should now fully comply with the relevant rules.
2. Corresponding regulatory authorities
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) are responsible for developing the regulatory framework and supervising major stablecoin issuers and related service providers.
The competent authorities of the member states where the stablecoin issuers are located also have partial supervisory powers over stablecoin issuers.
3. Regulatory framework and main contents
a. Definition of Stablecoin
Article 18 of the MiCA Act divides stablecoins into two categories:
I. Electronic Money Tokens (EMT)
EMT refers to crypto assets that stabilize their value with reference to only one official currency. The MiCA Act clearly states that the functions of EMT are very similar to those of electronic money as defined in Directive 2009/110/EC. Like electronic money, EMT is essentially an electronic substitute for traditional legal tender and can be used in daily life scenarios such as payment.
II. Asset-Referenced Tokens (ART)
ART refers to a crypto asset that stabilizes its value with reference to a combination of values that includes one or more official currencies.
The difference between EMT and ART is not only in the type and amount of official currency to which they refer. Article 19 of the MiCA Act elaborates on the difference between the two:
According to the relevant definition of Directive 2009/110/EC, the holder of electronic money tokens, namely EMT, always enjoys the creditors rights against the electronic money issuer and has the contractual right to redeem the value of the electronic money held at par at any time. This means that the repayment ability of EMT is absolutely guaranteed by legal claims.
In contrast, ARTs do not automatically give their holders a claim against the issuer of such crypto-assets and may therefore not fall within the scope of Directive 2009/110/EC. Some ARTs do not give their holders a claim against the par value of the reference currency or impose redemption restrictions. If ART holders do not have a claim against their issuer, or if the claim they have does not match the par value of the reference currency, then the holders confidence in the stability of the ART may be shaken.
All the analysis on the normative level in the following text will also be carried out from the two dimensions of ART and EMT respectively.
As for algorithmic stablecoins, the MiCA Act does not include algorithmic stablecoins in the regulatory framework of stablecoins. Since algorithmic stablecoins do not have clear reserves linked to any real assets, algorithmic stablecoins do not fall within the scope of EMT or ART defined in the MiCA Act.
From a regulatory perspective, this actually means that algorithmic stablecoins are prohibited under the MiCA Act. The MiCA Act’s stance on algorithmic stablecoins is very similar to the policy orientations of the United States, Hong Kong and other places. It can also be seen that regulators in various countries are cautious about algorithmic stablecoins that lack real asset reserves.
Analysis of relevant regulations on ART in the MiCA Act
b. Entry threshold for issuers
According to the relevant provisions of Article 16 of the MiCA Act, there are two types of issuers of ART:
The first type is a legal person or other enterprise established in the EU and authorized by the competent authorities of its member states in accordance with Article 21 of the MiCA Act. If an enterprise wants to apply for authorization from the relevant authorities first, the application should include: the issuers address, legal entity identification code, company articles, business model, legal opinion and other relevant information and documents.
The second type is a credit institution that meets Article 17 of the MiCA Act. Article 17 of the MiCA Act clearly stipulates that the credit institution needs to provide the relevant authorities with various relevant documents such as operating plans, legal opinions, and token governance arrangements within 90 days.
However, MiCA also provides for exemptions from the issuers qualifications. When an issuer meets any of the following conditions, it can be exempted from the above-mentioned qualification requirements for ART issuers.
I. The average circulation value of the ART issued by it in one year has never exceeded 5,000,000 euros or other equivalent official currencies;
II. The ART is only issued to qualified investors and circulated only among qualified investors;
Although the MiCA Act exempts the above two types of ART issuers from the qualification requirements, it does not mean that they will not be regulated. In fact, the ART issuer still needs to draft a crypto asset white paper in accordance with the relevant provisions of Article 19 of MiCA and notify the competent authorities of its member states of the white paper for filing.
(The above picture is the original text of the relevant provisions of Article 16.2 of the MiCA Act)
In addition, MiCA has implemented stricter supervision on ARTs with an average circulation value of more than EUR 100,000,000. Their issuers will have additional reporting obligations and should report the following information to the competent authorities every quarter:
The number of holders, the value of issued ART and the size of asset reserves, the average number of ART transactions per day and the average transaction amount in that quarter, and other information.
Finally, the MiCA Act also clarifies the own capital requirements for all ART issuers. The own capital that ART issuers should always have should be greater than or equal to the highest of the following three standards:
I. 350,000 Euros;
II. 2% of the average amount of reserve assets referred to in Article 36;
III. One quarter of the previous year’s fixed overheads.
To sum up, the MiCA Act adopts a more flexible tiered supervision model for ART token issuers.
ART issuers whose average circulation value does not exceed EUR 5,000,000 or who issue and circulate ART only to qualified investors may be exempted from the issuer qualification requirements, but still need to draft a crypto asset white paper and notify the competent authority.
ART issuers with an average circulation value of EUR 5,000,000 to EUR 100,000,000 need to meet the MiCA Acts ART issuer qualification requirements, complete the corresponding authorization application and submit the corresponding materials.
ART issuers with an average circulation value of more than EUR 100,000,000 will need to meet the issuer qualification requirements and assume additional reporting obligations.
All ART issuers, regardless of the average circulation value of their tokens and the issuing group, need to have at least sufficient own funds.
(The issuer qualification requirements corresponding to different ARTs in the above figure)
c. Currency stabilization mechanism and maintenance of reserve assets
First, Article 36 of the MiCA Act clearly stipulates that ART issuers need to always maintain reserve assets, and the reserve and management of the reserve assets meet the following core conditions:
I. Ability to cover risks associated with ART-linked assets;
II. and be able to address liquidity risk associated with holders’ perpetual redemption rights.
In other words, the reserve assets of the ART issuer, on the one hand, need to avoid and cover the inherent risks caused by the reserve assets themselves, and on the other hand, they must be able to cope with the external run risks caused by redemption of token holders.
However, the MiCA Act does not provide clear regulatory standards for the amount and type of reserve assets of ART issuers. Instead, it specifies that the European Banking Authority is responsible for drafting relevant technical standards to further clarify reserve assets and liquidity requirements.
(The above picture is part of the original text of Article 36 of the MiCA Act)
Secondly, the ART issuer should ensure that the reserve assets are completely isolated from the issuer’s own assets and entrust the reserve assets to a third party for independent custody.
Finally, the ART issuer can use part of the reserve assets for investment, but the investment must meet the following conditions:
I. The investment targets are highly liquid financial instruments with minimal market risk, credit risk and concentration risk;
II. The investment should be able to be realized quickly and with minimal adverse impact on price when exited.
In short, reserve assets can only be used to invest in extremely low-risk, extremely high-liquidity compliant financial instruments, thereby minimizing the risks faced by reserve assets.
d. Compliance in the circulation process
First, Article 39 of the MiCA Act clearly stipulates that ART holders should have the right to initiate redemption against the issuer of ART at any time. ART should also be redeemed at the market price of the reference asset at the request of the holder. At the same time, the ART issuer should formulate corresponding policy rules for the holders permanent redemption right, listing the specific conditions for exercising the redemption right and the underlying mechanism for token redemption.
Secondly, the MiCA Act also limits the maximum circulation of ART. If the quarterly transaction volume and average daily transaction value of a certain ART exceed 1 million transactions and 200,000,000 euros respectively, the issuer shall immediately stop issuing the ART token and submit a plan to the competent authority within 40 working days to ensure that the transaction volume and transaction value of the token are lower than the above standards.
This means that the MiCA Act sets a rigid maximum standard for the circulation of ART tokens, and ART cannot exceed this ceiling in any case. This rule is also intended to avoid the internal liquidity risk that may be caused by excessive circulation of ART.
e. Special regulatory rules for important ART
Significant Asset-Referenced Tokens (ARTs) refer to ARTs that meet specific criteria, with a total of seven criteria.
The first three criteria are related to the circulation and market value of ART itself:
I. The number of holders of the ART is greater than 10,000,000;
II. The market value or reserve asset size of the ART is greater than EUR 5,000,000,000;
III. The average daily transaction volume and average daily transaction value of the ART are higher than 2.5 million transactions and EUR 500,000,000 respectively;
The last four criteria relate to certain characteristics of the ART issuer:
IV. The ART Issuer is a core platform service provider designated as a gatekeeper pursuant to Regulation (EU) No 2022/1925 of the European Parliament and of the Council;
V. The ART Issuer’s activities are of international importance and include the use of the Asset Reference Token for payments and remittances;
VI. Interconnectedness of the ART Issuer and the Financial System
VII. The ART issuer also issues other ARTs, EMTs, or provides at least one Crypto-Asset Service.
When an ART meets three of the above seven criteria, the European Banking Authority shall classify the ART as a significant ART, and the supervisory responsibility for the ART issuer shall be transferred from the competent authority of the issuers Member State to the European Banking Authority within 20 working days from the date of notification of the decision, and the European Banking Authority shall carry out subsequent supervision.
The reason for distinguishing the concept of important ART is that Article 45 of the MiCA Act clearly stipulates that issuers of important ARTs need to bear additional obligations, including but not limited to:
I. Important ART issuers should adopt and implement a remuneration policy that promotes effective risk management.
II. Issuers of significant ARTs should assess and monitor token liquidity needs to meet the requirements of their holders to redeem asset reference tokens. To this end, issuers of significant asset reference tokens should establish, maintain and implement liquidity management policies and procedures;
III. Issuers of important ARTs should conduct liquidity stress tests on tokens regularly. The European Banking Authority, the regulatory authority, will also dynamically adjust the liquidity requirements for the ART based on the results of the liquidity stress test.
A brief analysis of the relevant regulations on EMT in the MiCA Act
Compared with ART, EMT (Electronic Money Tokens) has stricter entry thresholds and qualification requirements for issuers. Only certified Electronic Money Institutions (EMI) or credit institutions can legally issue EMTs under the MiCA Act. At the same time, EMT issuers also need to draft a white paper on crypto assets and notify the competent authorities of the white paper.
In addition, the MiCA Acts regulatory requirements for the maintenance and management of reserve assets of EMT issuers are similar to the relevant regulations for ART issuers and have many overlaps, which will not be analyzed in detail here.
2. United Arab Emirates
1. Regulatory process
In June 2024, the Central Bank of the United Arab Emirates issued the Payment Token Services Regulation, which clarified the definition and regulatory framework of payment tokens (stablecoins).
2. Regulatory documents
The core regulatory document is the Payment Token Services Regulation mentioned above.
3. Regulatory authorities
The United Arab Emirates is a federal country consisting of seven autonomous emirates. Famous emirates include Dubai, Abu Dhabi, etc. Therefore, the UAEs stablecoin regulatory framework also has the characteristics of a federation-emirate dual track.
The Central Bank of the UAE has issued the Payment Token Services Regulations and is directly responsible for supervising stablecoin issuance activities at the federal level. However, the jurisdiction of the Central Bank of the UAE does not include the two financial free zones in the UAE: DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market).
Both have independent legal systems and corresponding regulatory agencies, and are therefore not directly subject to the jurisdiction of the UAE Central Bank.
This federation-emirate dual-track parallel regulatory system, on the one hand, ensures unified supervision of stablecoin issuance at the federal level and ensures the steady development of the stablecoin industry, and on the other hand, leaves room for institutional innovation and exploration in financial free zones. As a federal country, the UAEs dual-track regulatory system is obviously clearer and more efficient than the chaotic and disorderly crypto asset regulatory system in the United States, where the SEC, CFTC, and Fed take turns to appear and the jurisdiction is chaotic.
4. Core content of the regulatory framework
a. Definition of Stablecoin
The Payment Token Service Regulations (hereinafter referred to as the “Regulations”) do not use the concept of “stablecoin”, but use the term “payment token”. For the consistency of the expression of the whole text, it will also be referred to as “stablecoin” in the following text.
The regulation also clearly defines the concept of stablecoin in Article 1:
“A virtual asset that is designed to maintain a stable value by reference to the value of a fiat currency or another stablecoin denominated in the same currency.”
(The above picture is Article 1.51 of the Payment Token Services Regulations)
From this, it can be seen that compared with the EUs MiCA Act and Hong Kongs Stablecoin Ordinance, this regulation has a broader definition of stablecoins.
In addition, this regulation also clarifies in Article 4 which tokens do not fall within the scope of stablecoins regulated by this regulation.
Exemptions based on token type: Tokens used for reward programs, or points tokens that circulate only within a specific ecosystem, such as tokens issued in a supermarket’s membership points incentive program, are not subject to this regulation.
Exemptions based on token usage: Stablecoins with reserve assets of less than AED 500,000 and a total number of token holders not exceeding 100 are also exempt from this regulation.
Compared with the detailed layered regulatory model of the EUs MiCA Act, this regulations regulatory model for stablecoins is more concise and to the point.
It should be noted that in addition to regulating the issuers of stablecoins, this regulation also covers related activities such as conversion, custody, and transfer of stablecoins. The following article will focus on analyzing the relevant regulations for stablecoin issuers.
b. Entry threshold for issuers
Stablecoin issuers need to meet the following application requirements when applying for a license
Meet the legal form requirements:
The applicant must be a corporate entity incorporated in the UAE and must be licensed or registered by the Central Bank of the UAE.
Initial Capital Requirements;
Necessary Documents and Information.
c. Currency stabilization mechanism and maintenance of reserve assets
First, stablecoin issuers must establish effective and robust systems to protect and manage reserve assets and ensure that:
Reserve assets are used only for specified purposes;
Protect reserve assets from operational and other related risks;
Reserve assets should in all circumstances be protected from claims by other creditors of the issuer.
Secondly, the stablecoin issuer must store the reserve assets in cash in a separate custody account to ensure the independence and security of the reserve assets. The custody account must be designated to hold the reserve assets of the stablecoin issuer.
Finally, the Regulation also provides clear requirements for the maintenance and management of reserve assets:
The value of the reserve assets of the stablecoin issuer must at least reach the total fiat currency face value of the stablecoins in circulation, that is, sufficient reserves must be maintained. This requirement is the same as the regulations in the European Union and Hong Kong.
Stablecoin issuance must accurately record and verify the inflow and outflow records of stablecoin reserve assets, and regularly reconcile the system recording results with the actual reserve assets to ensure the consistency between the book value and actual value of the reserve assets.
Stablecoin issuers need to hire an external audit team to conduct monthly audits and ensure the independence of the audit team - there is no direct connection between the audit team and the stablecoin issuer. The third-party audit team will confirm that the value of the reserve assets is not less than the fiat currency denomination of the stablecoin in circulation. From this, it can be seen that the audit requirements for reserve assets in this regulation are relatively high. Tether, the issuer of the largest stablecoin USDT, currently only conducts quarterly audits and does not meet the requirements of this regulation for audit transparency.
Stablecoin issuers must establish sound internal control measures and procedures to protect reserve assets from risks such as misappropriation, fraud, and theft.
d. Compliance requirements in the circulation process
This regulation mainly focuses on the following aspects regarding the compliance of stablecoin circulation:
[Stablecoins are only used as payment tools, and interest-bearing stablecoins are not recognized]
First, the regulations make it clear that stablecoins shall not pay any interest or other benefits to customers related to the holding period. In other words, stablecoins can only be used as a pure payment tool and cannot have any financial management attributes. Therefore, under the framework of this regulation, interest-bearing stablecoins (such as the USDY token issued by Ondo) are completely unacceptable. This specification is also consistent with the mainstream regulatory stance in various places.
Unrestricted redemption of stablecoins
Secondly, stablecoin holders can redeem stablecoins for corresponding legal tender at any time without restriction. Stablecoin issuers must clearly state the redemption conditions and redemption-related fees of the stablecoin in the customer agreement. Stablecoin issuers may not charge unreasonable redemption fees beyond reasonable costs.
【Anti-terrorist financing and anti-money laundering requirements】
Stablecoin issuers, i.e. anti-money laundering obligors, must comply with the relevant anti-money laundering/anti-terrorist financing laws and regulations applicable in the UAE, and formulate comprehensive and effective internal anti-money laundering strategies and internal control measures.
Generally speaking, the anti-money laundering/anti-terrorist financing responsibility requirements for stablecoin issuers will directly apply to the relevant regulations currently in force in that country. For example, stablecoin issuers in Hong Kong also need to comply with the relevant provisions of the Hong Kong Anti-Money Laundering Ordinance. This essentially incorporates stablecoin issuers into the overall anti-money laundering regulatory framework of the country or region for joint supervision.
【Payment and personal information protection】
Stablecoin issuers should formulate relevant policies to protect and maintain the personal data of users they collect, but stablecoin issuance may disclose the above personal data to the following institutions in certain circumstances:
Central Bank of the United Arab Emirates;
Other supervisory authorities approved by the Central Bank;
courts;
or other government agencies with access rights.
3. Singapore
1. Regulatory process
In December 2019, the Singapore authorities introduced the Payment Services Act, which clarified the definition, entry threshold, corresponding licenses and other relevant regulations of payment service providers.
The Monetary Authority of Singapore (MAS) issued a consultation document on the proposed Stablecoin Regulatory Framework in December 2022 to solicit public opinions. Less than a year later, MAS officially released the Stablecoin Regulatory Framework on August 15, 2023, which applies to single-currency stablecoins (SCS) issued in Singapore and pegged to the Singapore dollar or G10 currencies.
2. Regulatory documents
Payment Services Act
Stablecoin Regulatory Framework
Among them, the Stablecoin Regulatory Framework as a supplement to the Payment Services Act further clarifies the compliance requirements for stablecoin issuers.
3. Regulatory authorities
It is regulated by the Monetary Authority of Singapore (MAS), which is responsible for issuing stablecoin issuance licenses and compliance supervision.
4. In the core of the regulatory framework
a. Definition of Stablecoin
Article 2 of the Payment Services Act defines payment tokens as follows:
(1) Expressed in units;
(2) It is not denominated in any currency, and its issuer does not peg it to any currency;
(3) is or is intended to become a medium of exchange accepted by the public or a section of the public as payment for goods or services or in satisfaction of debts;
(4) Can be transferred, stored or traded in electronic form.
(The above picture shows the original definition of digital payment tokens in Article 2 of the Payment Services Act)
Similarly, in order to ensure the fluency and consistency of the entire text, the term stablecoin will be used instead of payment token in the following text.
The subsequently released Stablecoin Regulatory Framework has a stricter definition of stablecoins, regulating only single-currency stablecoins issued in Singapore and pegged to the Singapore dollar or G10 currencies.
b. Entry threshold for issuers
If a stablecoin issuer wants to apply for a MAS license, it needs to meet the following three conditions:
Base Capital Requirement: The capital of a stablecoin issuer must not be less than 50% of annual operating expenses or S$1 million.
Business Restriction Requirement: Stablecoin issuers are not allowed to engage in other businesses such as trading, asset management, pledge, lending, etc., nor are they allowed to directly hold shares in other legal entities.
Solvency requirement: Liquidity assets must be sufficient to cover normal cash withdrawals or be higher than 50% of annual operating expenses.
c. Currency stabilization mechanism and maintenance of reserve assets
MAS has made the following regulations on the management and maintenance of stablecoin reserve assets:
First, the reserve assets of the issuer of stablecoins can only consist of the following extremely low-risk and highly liquid assets: cash, cash equivalents, and bonds with a remaining maturity of no more than three months.
The issuers of the above assets must be: sovereign governments, central banks or international institutions with a rating of AA- or above.
It can be seen that MAS’s restrictions on the reserve assets of stablecoin issuers are very strict and detailed. This is in stark contrast to the UAE’s regulatory framework, which does not make clear restrictions on the reserve asset composition of stablecoin issuers.
Secondly, stablecoin issuers must establish funds and open segregated accounts to strictly separate their own funds and reserve assets.
Finally, the daily market value of the stablecoin issuers reserve assets must be higher than the circulation scale of the stablecoin to ensure sufficient reserves.
d. Compliance requirements in the circulation process
Stablecoin issuers need to bear the legal redemption obligations. Stablecoin holders can freely redeem stablecoins, and stablecoin issuers must redeem the stablecoins of holders at par value within five working days.
This article only represents the personal views of the author and does not constitute legal advice or legal opinion on specific matters.
