Web3 Lawyer's In-Depth Interpretation: A Detailed Explanation of the Stablecoin Regulatory Frameworks in the EU, UAE, and Singapore

Written by: encryption salad

In previous articles, the encryption salad team provided a detailed introduction to 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 around the world have also established relatively comprehensive stablecoin regulatory frameworks.

In this article, the encryption salad team has selected three of the most representative and internationally influential countries or regions - the European Union, the United Arab Emirates, and Singapore. Using the same analytical framework and thought logic, combined with the encryption salad team's experience in blockchain projects, we will outline the regulatory frameworks of stablecoins for each of the three.

This article analyzes the regulatory framework for stablecoins from the following perspectives: regulatory processes, normative documents, regulatory agencies, 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 Content of the Regulatory Framework

a. Definition of stablecoin

b. The issuer's access threshold

c. Maintenance of the value stability mechanism and reserve assets

d. Compliance requirements in the circulation环节

e. Special regulatory rules for important ART

(2) United Arab Emirates

1. Regulatory processes and regulatory documents

2. Corresponding regulatory authorities

3. Main Content of the Regulatory Framework

a. Definition of stablecoin

b. The issuer's access threshold

c. The maintenance of the currency value stabilization mechanism and reserve assets

d. Compliance requirements in the circulation segment

(3) Singapore

1. Regulatory processes and normative documents

2. Corresponding regulatory authorities

3. Main Content of the Regulatory Framework

a. Definition of stablecoins

b. The access threshold for the issuer

c. The maintenance of the currency stability mechanism and reserve assets

d. Compliance requirements for circulation links

(The above image is a comparison diagram of the stablecoin regulatory frameworks of the EU, UAE, and Singapore, for reference only.)

1. European Union

2. Regulatory processes and normative documents

The EU officially released the core regulatory document "Regulation on Markets in Crypto-Assets" (hereinafter referred to as the "MiCA Regulation") in June 2023. The "MiCA Regulation" aims to establish a unified regulatory framework for crypto assets and address issues such as regulatory fragmentation among member states.

The relevant rules regarding the issuance of stablecoins in the MiCA Act officially came into effect on June 30, 2024, and all companies subject to these rules must now fully comply with the relevant regulations.

2. Corresponding regulatory authorities

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) are responsible for establishing a regulatory framework and overseeing significant stablecoin issuers and related service providers.

The competent authority of the member state where the stablecoin issuer is located also has some regulatory power over the stablecoin issuer.

3. Regulatory Framework and Main Content

a. Definition of Stablecoins

Article 18 of the MiCA Regulation classifies stablecoins into two categories, namely

I. Electronic Money Tokens (EMT)

EMT refers to a type of encryption asset that stabilizes its value by referencing only one official currency. The MiCA Regulation explicitly states that the function of EMT is very similar to the function of electronic money as defined in Directive 2009/110/EC. Like electronic money, EMT is essentially an electronic substitute for traditional fiat currency, which can be used in everyday life scenarios such as payments.

II. Asset-Referenced Tokens (ART)

ART refers to a type of encryption asset that stabilizes its value by referencing a combination of one or more official currencies.

The difference between EMT and ART is not just in the type and quantity of the official currency referenced; Article 19 of the MiCA Regulation provides a detailed explanation of the differences between the two.

According to the relevant definitions of Directive 2009/110/EC, holders of electronic money tokens, i.e., EMT, always have a creditor claim against the issuer of electronic money and have the contractual right to redeem the monetary value of the electronic money held at face value at any time. This means that the redemption capability of EMT is absolutely guaranteed by a statutory creditor claim.

In comparison, ART does not necessarily grant its holders a claim against the issuers of such encryption assets, and thus may not fall under the jurisdiction of Directive 2009/110/EC. Some ART does not confer its holders a claim to the nominal value of the referenced currency, or impose restrictions on the redemption period. If ART holders do not have claims against their issuers, or if their claims do not match the nominal value of the referenced currency, then the holders' confidence in that stability may be shaken.

All subsequent analyses regarding the regulatory aspects will be elaborated from the dimensions of ART and EMT.

Regarding algorithmic stablecoins, the MiCA regulation does not include algorithmic stablecoins within the regulatory framework for stablecoins. Since algorithmic stablecoins do not have a clear reserve linked to any real asset, they do not fall under the categories of EMT or ART as defined in the MiCA regulation.

From a regulatory perspective, this actually means that algorithmic stablecoins are prohibited under the MiCA legislation. The stance of the MiCA legislation towards algorithmic stablecoins is very similar to the policy directions in the United States, Hong Kong, and other regions. This also indicates that regulatory agencies in various countries maintain a cautious attitude towards algorithmic stablecoins that lack real asset reserves.

Analysis of the relevant regulations on ART in the MiCA Act

b. The admission threshold for the issuer

According to the provisions of Article 16 of the MiCA Regulation, there are two types of issuers for ART:

The first type is a legal person or other enterprise that has been established in the European Union and has obtained authorization from the competent authorities of its member states according to Article 21 of the MiCA Act. If an enterprise wishes to apply for authorization from the relevant authorities in advance, the application should include: issuer's address, legal entity identifier, articles of association, business model, legal opinions, and other relevant information and documents.

The second type is a credit institution that meets the requirements of Article 17 of the MiCA regulation. Article 17 of the MiCA regulation explicitly states that the credit institution must provide various relevant documents to the competent authority within 90 days, including an operational plan, legal opinions, and token governance arrangements.

However, MiCA also supplements the provisions regarding exemptions for issuer qualifications. When an issuer meets any of the following conditions, it may be exempted from the qualification requirements for ART issuers mentioned above.

I. The average circulating value of the ART issued has never exceeded 5,000,000 euros or other equivalent official currencies within one year;

II. The ART is issued only to qualified investors and is only circulated among qualified investors;

Although the MiCA Regulation exempts the qualification requirements for the above two types of ART issuers, it does not mean that there is no regulation at all. In fact, the ART issuer is still required to draft an encryption asset white paper in accordance with Article 19 of the MiCA and notify the competent authority of its home member state, completing the filing.

(The above image is the original text of Article 16.2 of the MiCA Regulation)

In addition, MiCA imposes stricter regulations on ART with an average circulation value exceeding 100,000,000 euros, and its issuers will bear additional reporting obligations, requiring them to report the following information to the competent authorities on a quarterly basis:

The number of holders, the value of the issued ART, the scale of asset reserves, the average daily trading volume of ART per day in that quarter, and the average transaction amount, among other information.

Finally, the "MiCA Regulation" also clarifies the own funds requirements for all ART issuers. The own funds that ART issuers should always have must be greater than or equal to the highest value among the following three standards:

I.350,000 euros;

II. 2% of the average amount of reserve assets mentioned in Article 36;

III. A quarter of the fixed management costs from the previous year.

In summary, the MiCA regulation adopts a relatively flexible "layered regulation" model for ART token issuers.

The average circulating value does not exceed 5,000,000 euros, or ART issuers that are issued and circulated only to qualified investors may be exempt from the issuer qualification requirements, but must still draft an encryption asset white paper and notify the competent authorities.

Issuers of ART with an average circulating value between 5,000,000 euros and 100,000,000 euros must meet the qualification requirements for ART issuers under the MiCA Regulation, complete the corresponding authorization application, and submit the relevant materials.

For ART issuers with an average circulating value exceeding 100,000,000 euros, additional reporting obligations must be undertaken while meeting the issuer qualification requirements.

All ART issuers, regardless of the average circulating value of their tokens and the issuing community, need to have at least sufficient own funds.

(The issuer qualification requirements corresponding to different ART in the above image)

c. Stability mechanism of currency value and maintenance of reserve assets

First, Article 36 of the MiCA Regulation clearly stipulates that ART issuers must always maintain reserve assets, and the reserve and management of these assets must meet the following core conditions:

I. Capable of covering risks related to assets linked to ART;

II. And it can address the liquidity risks associated with the permanent redemption rights of the holders.

In other words, the reserve assets of the ART issuer need to avoid and cover the inherent risks caused by the reserve assets themselves, while also being able to cope with the external redemption risks caused by token holders.

However, the MiCA Regulation does not provide clear regulatory standards regarding the amount and types of reserve assets for ART issuers, but instead designates the European Banking Authority to regulate and draft relevant technical standards, further clarifying the requirements for reserve assets and liquidity.

(The above image is the original text of Article 36 of the MiCA Act)

Secondly, the ART issuer should ensure that the reserve assets are completely separated from the issuer's own assets and that the reserve assets are independently custodied by a third party.

Finally, the ART issuer can use a portion of the reserve assets for investment, but the investment must meet the following conditions:

I. The investment targets are high liquidity financial instruments with minimal market risk, credit risk, and concentration risk;

II. The investment should be able to be quickly liquidated, and the adverse impact on the price upon exit should be minimized.

In short, reserve assets can only be used to invest in compliant financial instruments that have extremely low risk and extremely high liquidity, thereby minimizing the risks faced by the reserve assets.

d. Compliance in the circulation segment

First, Article 39 of the MiCA Regulation clearly states that ART holders shall have the right to initiate redemption from the issuer of ART at any time. Additionally, ART should be redeemed based on the market price of the reference asset, as requested by the holders. At the same time, the issuer of ART should establish corresponding policy rules regarding the holders' permanent redemption rights, specifying the specific conditions for exercising the redemption rights and the underlying mechanism for token redemption.

Secondly, the MiCA legislation also imposes a limit on the maximum circulation of ART. If the quarterly transaction volume and the daily average total transaction value of a certain ART exceed 1 million transactions and 200,000,000 euros respectively, the issuer must immediately cease further issuance of that 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 remain below the aforementioned standards.

This also means that the MiCA Regulation sets a hard upper limit on the circulation volume of ART tokens, establishing a ceiling that ART cannot exceed under any circumstances. This rule is also designed to mitigate the internal liquidity risks that may arise from an excessively high circulation volume of ART.

e. Special regulatory rules for important ART

Significant Asset-Referenced Tokens (ART) refer to ARTs that meet specific criteria, of which there are a total of seven.

The first three standards are related to the circulation and market value of ART itself:

I. The number of holders of this ART is greater than 10,000,000;

II. The market value or reserve asset size of this ART is greater than 5,000,000,000 euros;

III. The average daily transaction volume and average daily transaction value of this ART are both higher than 2.5 million transactions and 500,000,000 euros.

The last four standards are related to certain characteristics possessed by ART issuers:

IV. The ART issuer is designated as a Gatekeeper core platform service provider under Regulation (EU) 2022/1925 of the European Parliament and of the Council;

V. The activities of the ART issuer have international significance, including the use of asset-referenced tokens for payments and remittances;

VI. The interconnectedness of the ART issuer and the financial system

VII. The ART issuer also issued other ART, EMT, or provided at least one encryption asset service (Crypto-Asset Service).

When an ART meets three of the seven criteria mentioned above, the European Banking Authority shall classify the ART as significant. Moreover, the regulatory responsibilities of the ART issuer shall be transferred from the competent authority of the member state where the issuer is located to the European Banking Authority within 20 working days from the date of notification of the decision, and subsequent supervision shall be carried out by the European Banking Authority.

The reason for distinguishing the concept of important ART is that Article 45 of the MiCA Regulation clearly stipulates that important ART issuers are required to bear additional obligations, which include but are not limited to:

I. Important ART issuers should adopt and implement remuneration policies that facilitate effective risk management.

II. Important ART issuers should assess and monitor the liquidity demand for tokens to meet the redemption requirements of their holders for the asset reference tokens. To this end, issuers of important asset reference tokens should establish, maintain, and implement liquidity management policies and procedures;

III. Important ART issuers should regularly conduct liquidity stress tests on the tokens. The regulatory authority, the European Banking Authority, will also dynamically adjust the liquidity requirements for the ART based on the results of the liquidity stress tests.

An Analysis of the Relevant Provisions of EMT in the MiCA Act

EMT ( Electronic Money Tokens ) have stricter issuer admission thresholds and qualification requirements compared to ART, and only certified Electronic Money Institutions ( Electronic Money Institution, EMI ) or credit institutions can legally issue EMT under the "MiCA Regulation". At the same time, EMT issuers are also required to draft an encryption asset white paper and notify the regulatory authorities about this white paper.

In addition, the regulatory requirements for the maintenance and management of reserve assets for EMT issuers under the MiCA Regulation are quite similar to those for ART issuers, with many overlaps; this will not be analyzed further.

2. United Arab Emirates

3. Regulatory Process

In June 2024, the Central Bank of the UAE issued the "Payment Token Services Regulation," which clarifies the definition and regulatory framework for "payment tokens" (stablecoins).

2. Standard document

The core regulatory document is the "Payment Token Services Regulation" mentioned above (Payment Token Services Regulation).

3. Regulatory Authorities

The UAE is a federal country composed of seven autonomous emirates. Among the famous emirates are Dubai, Abu Dhabi, and so on. Therefore, the regulatory framework for stablecoins in the UAE also features a "federal-emirate" dual-track parallel characteristic.

The Central Bank of the UAE has issued the "Payment Token Service Regulation" and is directly responsible for regulating the issuance of stablecoins 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 regulatory systems and corresponding regulatory agencies, and therefore are not directly subject to the jurisdiction of the Central Bank of the UAE.

This "federal - UAE" dual-track parallel regulatory system guarantees unified regulation of stablecoin issuance at the federal level, ensuring the healthy development of the stablecoin industry, while also leaving room for institutional innovation and exploration in the financial free zone. As a federal country, compared to the chaotic and disorderly regulatory system for encryption assets in the United States - with the SEC, CFTC, and Fed taking turns, resulting in jurisdictional confusion - the dual-track regulatory system in the UAE is clearly much clearer and more efficient.

4. Core content of the regulatory framework

a. Definition of stablecoin

The "Payment Token Service Regulations" (hereinafter referred to as "these regulations") do not use the concept of "stablecoin," but instead use the expression "payment token." For the sake of consistency throughout the text, it will also be referred to as "stablecoin."

The regulation also clearly defines the concept of stablecoins in Article 1:

"A virtual asset designed to maintain stable value by referencing the value of a fiat currency or another stablecoin priced in the same currency."

(The above image is Article 1.51 of the "Payment Token Service Regulations")

It can be seen that, compared to the EU's MiCA regulation and Hong Kong's stablecoin regulations, the definition of stablecoins in this regulation is relatively broad.

In addition, this regulation also clarifies in Article 4 which tokens are not classified as stablecoins regulated by this regulation.

1. Exemption based on token type: Tokens used for reward programs, or point-based tokens that circulate only within a specific ecosystem, such as tokens issued in a supermarket's membership points incentive program, are not subject to these regulations.

2. Exemptions based on token usage: Stablecoins with reserve assets of less than 500,000 dirhams and a total number of token holders not exceeding 100 are also not subject to these regulations.

Compared to the detailed layered regulatory model of the EU's MiCA regulation, this regulation's approach to stablecoin oversight is much more straightforward.

It is important to note that this regulation not only regulates the issuers of stablecoins but also covers related activities such as the conversion, custody, and transfer of stablecoins. The following text will focus on analyzing the relevant regulations for stablecoin issuers.

b. The access threshold for the issuer

Stablecoin issuers need to meet the following application requirements when applying for a license.

Meet legal form requirements:

The applicant must be a legal entity registered in the UAE and must obtain permission or registration from the Central Bank of the UAE.

Initial Capital Requirements;

Necessary Documents and Information.

c. Maintenance of the currency stability mechanism and reserve assets

First, stablecoin issuers must establish an effective and robust system to protect and manage reserve assets, and ensure:

Reserves are only used for specified purposes;

Reserve assets are protected from operational risks and other related risks.

Reserve assets should be protected in all cases from claims by other creditors of the issuer.

Secondly, stablecoin issuers must keep reserve assets in cash form in a separate custodial account to ensure the independence and security of the reserve assets. This custodial account must be designated for holding the reserve assets of the stablecoin issuer.

Finally, this 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 equal the total face value of the fiat currency in circulation for the stablecoins, which means there must be sufficient reserves maintained. This requirement is the same as the regulations in places like the European Union and Hong Kong.

The issuance of stablecoins must accurately record and verify the inflow and outflow of stablecoin reserve assets, and regularly reconcile the system's recorded results with the actual reserve assets to ensure consistency between the book value and the actual value of the reserve assets.

Stablecoin issuers are required to hire external audit teams for 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 amount of the stablecoins in circulation. It can be seen that the auditing requirements for reserve assets in this regulation are relatively high. Currently, the issuer of the largest stablecoin USDT, Tether, only conducts quarterly audits and does not meet the transparency requirements for audits set by this regulation.

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 link

This regulation mainly focuses on the compliance of stablecoin circulation from the following perspectives:

[Stablecoins that serve only as payment tools, do not recognize interest-bearing stablecoins]

First of all, this regulation clarifies that stablecoins may not pay customers any interest or other benefits related to the holding period. In other words, stablecoins can only serve as pure payment tools and cannot possess any financial attributes. Therefore, under the framework of this regulation, interest-bearing stablecoins (such as the USDY token issued by Ondo) are completely unrecognized. This specification is also consistent with the mainstream regulatory positions in various regions.

[Redeem stablecoins without restrictions]

Secondly, holders of stablecoins can redeem their stablecoins for the corresponding fiat currency at any time without restrictions. The stablecoin issuer must clearly state the redemption conditions and any associated fees in the customer agreement. Furthermore, the stablecoin issuer is not allowed to charge unreasonable redemption fees beyond reasonable costs.

[Counter Terrorism Financing and Anti-Money Laundering Requirements]

Stablecoin issuers, as anti-money laundering obligated entities, must comply with the relevant laws and regulations on anti-money laundering / counter-terrorism financing applicable in the UAE, and establish comprehensive and effective internal anti-money laundering strategies and internal control measures.

In general, the anti-money laundering / counter-terrorist financing responsibility requirements for stablecoin issuers will directly apply to the relevant regulations 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 that country or region for joint supervision.

[Payment and Personal Information Protection]

Stablecoin issuers should establish relevant policies to protect and maintain the personal data of users they collect; however, under certain circumstances, stablecoin issuance may disclose the aforementioned personal data to the following institutions:

Central Bank of the UAE;

Other regulatory bodies approved by the central bank;

Court;

or other government agencies with access rights.

3. Singapore

4. Regulatory Process

In December 2019, the Singapore authorities introduced the Payment Services Act, which clarified the definition of Payment Services Providers, entry requirements, corresponding licenses, and other related regulations.

The Monetary Authority of Singapore (MAS) issued a consultation paper to the public in December 2022 regarding the proposed Stablecoin Regulatory Framework, seeking public feedback. Less than a year later, on August 15, 2023, MAS officially released the Stablecoin Regulatory Framework, which applies to single-currency stablecoins (SCS) issued in Singapore that are pegged to the Singapore dollar or G10 currencies.

2. Standard Documents

Payment Services Act

Stablecoin Regulatory Framework

Among them, the "Stablecoin Regulatory Framework" serves as a supplement to the "Payment Services Act", further clarifying the compliance requirements for stablecoin issuers.

3. Regulatory authorities

Regulated by the Monetary Authority of Singapore (MAS), responsible for issuing stablecoin issuance licenses and compliance supervision.

4. 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) Not priced in any currency, and its issuer does not peg it to any currency;

(3) is or aims to be a medium of exchange accepted by the public or a part of the public for the payment of goods or services or the discharge of debts;

(4) Can be transferred, stored, or traded in electronic form.

(The above image is the original text of Article 2 of the "Payment Services Act" defining digital payment tokens.)

Similarly, in order to ensure the fluency and consistency of the entire text, the term "stablecoin" will be used in place of "payment token" in the following sections.

The subsequently released "Stablecoin Regulatory Framework" has a stricter definition of stablecoins, only regulating single-currency stablecoins issued in Singapore that are pegged to the Singapore dollar or G10 currencies.

b. The access threshold for the issuer

If a stablecoin issuer wants to apply for a MAS license, they need to meet the following three conditions:

Base Capital Requirement: The capital of a stablecoin issuer must be no less than 50% of the annual operating expenses or 1 million SGD.

Business Restriction Requirement: Stablecoin issuers are not allowed to engage in trading, asset management, staking, lending, or other businesses, nor may they directly hold shares in other legal entities.

Solvency requirement: Liquid assets must meet the scale needed for normal asset withdrawals or be above 50% of annual operating expenses.

c. Stability mechanism of the currency value and maintenance of reserve assets

For the management and maintenance of stablecoin reserve assets, MAS has implemented the following regulations:

First, the reserve assets of the issuer of stablecoins can only consist of the following low-risk, highly liquid assets: cash, cash equivalents, and bonds with a remaining maturity of no more than three months.

The issuer of the above assets must be: a sovereign government, a central bank, or an international institution with a rating of AA- or above.

It can be seen that MAS has very strict and detailed restrictions on the reserve assets of stablecoin issuers. This is in stark contrast to the regulatory framework in the UAE, where there are no explicit restrictions on the reserve assets of stablecoin issuers.

Secondly, stablecoin issuers must establish a fund and open segregated accounts to strictly separate their own funds from reserve assets.

Finally, the daily market value of the reserve assets of the stablecoin issuer must be greater than the circulation scale of the stablecoin to ensure sufficient reserves.

d. Compliance requirements in the circulation link

Stablecoin issuers are required to fulfill a statutory redemption obligation. Stablecoin holders can freely redeem their stablecoins, and stablecoin issuers must redeem the holders' stablecoins at face value within five business days.

This only represents the personal views of the author and does not constitute legal advice or opinions on specific matters.