Stable coins pose new dilemmas for regulators as mass adoption emerges


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Stable coins pose particular challenges for the regulatory authorities. Although there is no single, agreed definition of a stable coin, the common denominator of the definitions commonly used is that stable coins are designed to have a stable value in relation to a particular currency, asset, or pool of such currencies / Maintain assets. They are in contrast to regular cryptocurrencies, which do not have such a stability mechanism and whose values ​​tend to fluctuate, sometimes even significantly.

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Stable coins do not denote a uniform category, but represent a large number of crypto instruments that can differ significantly in legal, technical, functional and economic terms. Despite its name, it is important to emphasize that this asset does not guarantee stability, which depends on the specific design features and governance mechanisms.

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Regulatory attention for stable coins

Stablecoins have been on the rise since 2014 when the first stablecoin, Tether (USDT), hit the market. Although they have become a major digital asset in the blockchain ecosystem within a few years, they haven’t drawn much regulatory attention. This changed suddenly with the announcement of the Libra project in June 2019 by the Libra Association, whose founding company is Facebook.

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Almost immediately, many financial authorities around the world – including the Financial Stability Board, the European Central Bank, the Bank of England, the US Federal Reserve, and the US House of Representatives’ Financial Services Committee – made strong statements about the Libra the collective is in The mood was caution and concern, highlighting the serious potential risks.

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The potential of Libra to go global and access billions of users through a user-centric platform for social networks opened up a whole new dimension to stablecoins. The potential impact of a global, but fast, inexpensive, simple and seamless payment solution through a platform that is already seamlessly integrated into the lives of the world’s people would be very far-reaching indeed. Authorities have recognized that this crypto-asset deserves special attention because of its potential scale, its limitlessness, and its impact on economies and financial systems.

In the following months, numerous official reports and documents analyzing stable coins were produced by bodies such as the ECB, the G7, the FSB, the Financial Action Task Force and the International Organization of Securities Commissions. They mainly highlighted risks and challenges, including risks to financial stability and concerns about consumer and investor protection, the fight against money laundering, the fight against the financing of terrorism, data protection, market integrity and monetary sovereignty, and competition and monetary policy issues. Cybersecurity, resilience and regulatory uncertainties.

Among the numerous official declarations and reports, the Libra Association announced a redesigned Libra 2.0 project in April 2020. Soon after, the coin was renamed Diem to distance it from the controversy surrounding the Libra.

Connected: New name, old problems? The rebranding of the Libra in Diem still faces challenges

Stablecoins and the United States

In the United States, the Office of Currency Auditor actively contributed to the debate and issued three interpretative letters on digital assets. The first letter, dated July 2020, concluded that national banks could hold digital assets in custody on behalf of their customers. The second letter, dated September 2020, concluded that national banks can hold stable coin reserve accounts on behalf of their customers. Finally, the latest January 2021 letter effectively allowed national banks and federal savings banks to participate as nodes in the independent node verification networks (a common form of which is a distributed ledger) and use stable coins to facilitate payment activities and other functions.

The OCC recognizes that stablecoins, like other electronically stored value systems, are electronic currency representations. Instead of storing the value in a more traditional way, it is represented in a stable coin. However, this only represents a technological distinction and has no influence on the underlying activity or its permissibility. In order to address potential risks, banks should act in accordance with the existing regulatory and compliance requirements, while complying with applicable laws and safe banking practices.

On the other hand, in December 2020, shortly before the end of the US Congress’s term of office, a draft of the Stablecoin Tethering and Bank Licensing Enforcement (Stablecoin Tethering and Bank Licensing Enforcement) bill was introduced, which provided for a significant increase in supervision of stablecoin, which required all stablecoin issuers Must have a banking charter, be licensed by multiple federal agencies, and follow banking regulations. The bill is at an early stage in the legislative process and has not yet been presented to the House of Representatives.

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Stablecoins and the European Union

In the meantime, the EU Commission published a comprehensive regulatory proposal on markets for crypto assets (MiCA) in September 2020, which aims to address potential risks to financial stability and an orderly monetary policy through stablecoins, especially those that have the potential to to be widely accepted and systemic. MiCA offers a tailor-made legal framework and defines a uniform set of rules for providers and issuers of crypto asset services.

Connected: Europe is waiting for the implementation of the legal framework for crypto assets

For stablecoins with significant potential, MiCA is introducing stricter compliance obligations, including stricter capital, investor and regulatory requirements. They include governance, conflicts of interest, reserves, custody, investments and the White Paper, as well as provisions on the approval and operating conditions of service providers that require special authorization. Requirements include regulatory protections, organizational requirements, and rules for the safekeeping of funds. In addition, there are more specific requirements for certain services, including the custody of crypto assets. Trading platforms; Exchange of crypto assets; Receipt, transmission and execution of orders; and advice on crypto assets.

MiCA is one of the most comprehensive attempts to regulate stablecoins, targeting stablecoins that are not subject to financial regulation. The EU regulators don’t want to leave a stable coin outside of the regulatory framework. The offering and trading of stable coins that do not fall under the MiCA definitions (e.g. tether) and do not meet the regulatory requirements is not permitted within the EU. Denial of regulatory approval for certain stablecoin products that thrive in other countries can lead to regulatory arbitrage.


Current global regulatory oversight is heavily focused on investigating and highlighting potential risks. The benefits of stablecoins and the benefits of cheaper, faster, and seamless payments (including cross-border transfers) are less emphasized, mostly just acknowledged.

A major regulatory challenge in relation to global stablecoins is the international coordination of regulatory efforts in different economies, jurisdictions, legal systems and different levels of economic development and needs. The demand for a harmonization of the legal and regulatory framework conditions covers areas such as the regulation of the use and exchange of data, competition policy, consumer protection, digital identity and other important political issues. Regulatory difficulties are exacerbated by a remarkable diversity in the structure, economic function, technological design, and governance models of stablecoin.

Stable coins are an important piece of the puzzle for a future DLT-based digital economy. The challenge for regulators is to ensure adequate regulatory treatment, support innovation, and address potential risks. The potential global reach of stable coins increases the regulatory tasks, but also increases the urgency and importance of appropriate regulatory considerations.

The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article is for general informational purposes and is not intended as legal advice and should not be construed as legal advice.

Agata Ferreira is Assistant Professor at Warsaw University of Technology and Visiting Professor at a number of other academic institutions. She studied law in four different jurisdictions under the common law and civil law systems. Agata worked in the UK financial sector as an attorney with a leading law firm and investment bank for over a decade. She is a member of an expert group at the EU Blockchain Observatory and Forum and a member of an advisory board for Blockchain for Europe.

The opinions expressed are those of the author alone and do not necessarily reflect the views of the university or its affiliates.