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Legal IT

Legal issues with stablecoins

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In the previous article, we talked about what stablecoins are, why they matter, and what different types of stablecoins there are. In this follow-up article, we look at the main legal issues. There are qualification issues with stablecoins. There are new regulatory frameworks. We also discuss some other risks and legal issues with stablecoins.

Qualification issues with stablecoins

The legal qualification of stablecoins remains one of the most debated issues, as they do not fit neatly into existing legal categories. The core challenge lies in determining whether stablecoins should be treated as money, securities, commodities, or something else entirely. This classification has significant implications for which regulators have jurisdiction, and which legal rules apply. In many jurisdictions, a key issue is whether a stablecoin qualifies as a security.

In the European Union, the Markets in Crypto-Assets Regulation (MiCA) resolves this ambiguity to a large extent by creating new categories specifically for stablecoins: “e-money tokens” and “asset-referenced tokens”. E-money tokens are those that are pegged to a single currency and resemble traditional electronic money under the E-Money Directive. Asset-referenced tokens are broader and can include tokens backed by baskets of currencies or commodities. This approach avoids trying to fit stablecoins into outdated categories like securities or commodities and instead regulates them on their own terms.

In the UK, the Financial Conduct Authority (FCA) does not generally treat fiat-backed stablecoins as securities unless they exhibit investment characteristics. However, the upcoming regulatory framework under the Financial Services and Markets Act 2023 will grant the Bank of England and FCA more tools to supervise stablecoins used for payments. At present, August 2025, they have not published any regulations yet.

In the United States, the Securities and Exchange Commission (SEC) has suggested that certain stablecoins, particularly those offering interest-bearing features or tied to investment mechanisms, may fall under the definition of securities. However, fiat-backed payment stablecoins like USDC or USDP, which simply maintain a 1:1 peg to a currency and do not generate returns for holders, are more often considered outside the scope of securities regulation. At the same time, the Commodity Futures Trading Commission (CFTC) has taken the position that some stablecoins may qualify as commodities. In a 2023 enforcement action, the CFTC referred to tethered assets like USDT as commodities under the Commodity Exchange Act. This has added to the regulatory uncertainty in the U.S., where overlapping authorities and inconsistent classifications have left issuers and users in legal limbo.

In essence, the legal qualification of stablecoins hinges on their structure and function. If they are used for payments and are fully backed by fiat currency reserves, they are more likely to be treated as payment instruments or e-money. If they are algorithmic, generate returns, or have speculative components, they may fall under securities or commodities laws. Regulatory frameworks are required to resolve the ambiguity and uncertainty stablecoin issuers face. Which brings us to …

Regulatory Frameworks

These days, the regulation of stablecoins is rapidly evolving. Regulatory initiatives focus on concerns about consumer protection, financial stability, and the risks of unregulated digital assets. Both the European Union and the United States have recently introduced or implemented significant legislative frameworks to address these concerns.

As mentioned above, in the European Union, stablecoins fall under the Markets in Crypto-Assets Regulation (MiCA). MiCA was formally adopted in 2023 and began phasing in from June 2024. MiCA distinguishes between different types of crypto assets. It introduces specific provisions for “e-money tokens” (which are pegged to a single fiat currency) and “asset-referenced tokens” (which may be backed by a basket of assets or commodities). Issuers of these stablecoins are required to obtain authorization from national competent authorities and must meet stringent governance, capital, and reserve requirements. MiCA also imposes obligations on crypto-asset service providers, ensuring oversight of issuance, custody, and trading. The European Central Bank has highlighted the importance of this framework to prevent the fragmentation of the digital finance market and to protect consumers.

In the United States, after years of regulatory ambiguity, Congress has recently made progress toward a unified approach. In July 2024, the Clarity for Payment Stablecoins Act was passed by the House Financial Services Committee and gained bipartisan traction. This bill focuses specifically on payment stablecoins, such as those issued by Circle (USDC) and Paxos (USDP), and introduces a clear licensing regime. Under this legislation, stablecoin issuers must either be state-licensed nonbank entities or federally approved institutions regulated by the Federal Reserve. The bill also imposes strict reserve backing requirements, limits on rehypothecation of reserve assets, and detailed disclosure obligations to increase transparency. In July 2025, the Genius Act – the first federal regulatory framework for stablecoins – was passed in Congress. It creates a new licensing regime for payment stablecoin issuers and is the first major crypto-related legislation to be passed by both chambers of Congress. The bill was signed into law on 18 July 2025.

Regulators in both areas understood that stablecoins might have a big impact once they become widely used. In the EU, MiCA includes special oversight mechanisms for “significant” stablecoins, allowing the European Banking Authority to step in. Similarly, in the U.S., the President’s Working Group on Financial Markets believes the federal government needs to regulate companies that issue stablecoins, especially the big ones that process lots of payments.

Outside the EU and U.S., countries like Japan and the UK are also catching up. Japan already passed a law in 2022 that allows only licensed banks and trust companies to issue stablecoins, while the UK’s Financial Services and Markets Act 2023 granted the Bank of England new powers to oversee systemic digital settlement assets, including fiat-backed stablecoins.

Other risks and legal issues with Stablecoins

Apart from classification and regulatory frameworks, stablecoins raise several other legal issues and risks. These have to do with financial stability, consumer protection, monetary sovereignty, and data governance. These concerns are particularly significant given the potential for stablecoins to scale rapidly across borders and integrate with mainstream financial services.

A first issue is the operational risk, especially the risk of technical failure, cyberattacks, or fraud within the stablecoin infrastructure. Since most stablecoins rely on centralized issuers or custodians, the reliability of reserve management and smart contracts is critical. A failure in these systems could cause a loss of peg, mass redemptions, or loss of user funds. In the previous article we mentioned the TerraUSD’s collapse in 2022, which was algorithmic stablecoin. Its collapse exposed how vulnerabilities in design can destabilize not only a single token but also the broader market. The US Financial Stability Board (FSB) has emphasized the importance of robust governance and risk management frameworks to prevent such collapses. Its October 2023 report outlines these concerns in detail.

Another legal concern is redemption rights. Users need clear, enforceable rights to redeem stablecoins for fiat currency on demand. In practice, many stablecoin issuers include disclaimers or reserve the right to delay or deny redemptions under certain conditions. This raises questions about contractual enforceability and consumer protection, particularly in jurisdictions without clear legal protections for token holders. The IMF has raised similar concerns in its global policy papers, especially when stablecoins operate across borders where legal remedies may be unclear or unenforceable.

There are also anti-money laundering (AML) and counter-terrorist financing (CTF) concerns. Stablecoins offer a relatively stable value and fast, borderless transfers, which make them attractive for illicit use. Many stablecoin platforms operate with limited KYC (Know Your Customers) procedures or allow anonymous transfers via decentralized protocols. Regulators have warned that this can undermine AML frameworks and create enforcement gaps.

Another major legal issue is monetary sovereignty. Central banks have raised concerns that widespread use of privately issued stablecoins could erode control over national currencies and monetary policy, especially in developing countries. If a stablecoin pegged to the US dollar becomes a dominant means of payment in another country, it can cause de facto dollarization and limit a central bank’s ability to manage inflation or respond to economic shocks.

Finally, data privacy and surveillance pose emerging legal and ethical challenges. Stablecoin providers often collect and process sensitive personal and financial data. In jurisdictions like the EU, such processing is subject to the General Data Protection Regulation (GDPR). But questions remain about how decentralized systems can comply with data minimization, user consent, and the right to erasure. Moreover, law enforcement access to stablecoin transaction data creates a tension between privacy rights and regulatory compliance.

Together, these issues show that the legal issues regarding stablecoins involves much more than just classification or licensing. Since stablecoins touch on financial law, contracts, data protection, monetary policy, and consumer rights, both companies and users face significant legal risks until we get better, more coordinated regulations worldwide.

 

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Legal IT

What lawyers need to know about the metaverse

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In the last few weeks, the metaverse has been in the news headlines on a nearly daily basis. Companies are investing billions in it and are looking to hire thousands of people to build it. In this article, we look at what lawyers need to know about the metaverse. It addresses the following questions: what is the metaverse, what can the metaverse be used for, what concerns have been raised about the metaverse, and how is the metaverse relevant for lawyers?

What is the metaverse?

Rather than starting off with an attempt at definition, it may be useful to first quickly go over the history of the idea or concept. The idea for the metaverse is the result of several technological evolutions that are converging. On the one hand, you have computer games that have created entire virtual online worlds that are becoming more and more life-like, and where people have avatars representing them to interact with others and the virtual environment. Another aspect is the increasing use of virtual reality and augmented reality tools in real life for different purposes like training, education, etc. Think, e.g., of a surgeon or medical students practicing a medical procedure. The pandemic has also created new needs for virtual meetings and conferences and has sped up the process of courts going online. All of these tools rely on the Internet. So, the vision rose to enhance the internet in a way that all these technologies could be combined in one parallel virtual / augmented online world where we can live, work, learn, relax, play, socialize, etc.

There is no commonly accepted definition for the metaverse yet. (There even are alternative names for it like, e.g., the omniverse). The Wikipedia, e.g., gives the following definition: “The metaverse (a portmanteau of “meta-” and “universe” or “Universe” and “Meta”) is the hypothesized next iteration of the internet, supporting decentralized, persistent online 3-D virtual environments.” This Wikipedia definition, however, is limited in its scope. These are some of the other aspects that leaders in the field are using to describe it: “a virtual world connecting all sorts of digital environments”, with “social human interaction at its core”; “a vision for a new place to interact with other humans and bots to play games, conduct business, socialize and shop”; “a fully immersive, partially real life, partially digital experience that runs in parallel with the physical world”; “a vast and immersive digital world that is inexorably enmeshed with our physical world”.

This new online world would, just like the Internet, always be on and accessible. At present, accessing such world requires the usage of virtual reality sets or augmented reality glasses, as well as smartphones, PCs, or game consoles. For the metaverse to become a success, investors and developers realise that they must make it more easily accessible, and that interoperability between metaverse applications is essential.

What can the metaverse be used for? Examples of current and future applications.

The early stages of the metaverse already exist. There are, e.g., well-defined use cases within the video game, business, education, retail, and real-estate sectors.

We already gave the examples of games that are being played in entire online worlds, and where millions of players can simultaneously interact with each other and the environment.

Anybody who worked from home during the pandemic undoubtedly is familiar with virtual business meetings. Many also became familiar with online training.

The same goes for education where classes were suddenly taught online instead of in class rooms or auditoria. In some cases, students can use virtual reality headset to learn to manipulate 3D virtual objects, etc.

There are virtual shops that you can walk around in to choose what you want to buy. Similarly, people looking to buy a house can take a virtual tour to determine whether it is worth visiting the actual house. Developers use 3D models of the projects they want to build and put them online for potential buyers and investors.

There already are early metaverse applications for sports and entertainment and for healthcare. During the pandemic there were live concerts that could be attended virtually, where the musicians physically were in different locations, all playing together.

All of this already exists and would be enhanced further. In the future metaverse, people and companies would have their virtual offices. The online shopping experience would dramatically change, too, where virtual shops become far more lifelike. You could have your avatar customised to match the way you look at present and, e.g., try on clothes in the virtual shop before ordering them.

Movies could become 3D environments where you can look around and have a 360-degree view of what is going on. Family reunions and gatherings could take place in virtual environments so those who cannot physically be present, can still attend.

The possibilities look endless.

What concerns have been raised about the metaverse?

While many of these evolutions are thing people can get excited about, there also are plenty of reasons for concerns. Here are a few.

Privacy: big tech companies like Google and Facebook already have a bad reputation when it comes to all the data they gather. Many privacy advocates rightfully point out that the situation could get far worse in the metaverse, especially if it is being run by the same or just a few companies.

There is a cluster of interlinked concerns that has to do with the spread of misinformation, alienation from real life through confirmation bias, and the resulting polarization of society. What are we talking about? In recent years, we have witnessed how social media have been abused to spread misinformation, either intentionally or unintentionally. There already is a problem where the algorithms used in social media are designed to provide you with the information you are interested in, which strengthens the phenomenon of confirmation bias. The algorithm does not care whether what it shows you is true; it is interested in showing you want you want to read. If you hold beliefs that are not true, the algorithms will show you information that confirms those beliefs. In other words, the metaverse may further distort users’ perceptions of reality with biased content to keep them engaged. This can lead to an alienation from what is real, and further contributes to an ongoing polarization of society.

Another problem has to do with online addiction. There have been many well-documented cases where people develop online addictions. With a metaverse that becomes more lifelike and more all-encompassing, an increase in addictions is anticipated.

Another set of concerns has legal implications. Who is in control of the metaverse? Who makes the rules and what rules apply? How are laws applied in virtual worlds? Can insults or threats in a virtual environment have real life repercussions? What if the threats are about the avatars, like somebody threatening to disfigure or destroy your avatar, or somebody replacing your avatar with a less desirable one? There also are concerns about monopolies or oligarchies where some tech companies rule and control everything. Many lawmakers already have expressed concerns about the power big tech companies currently have. In the metaverse, that could get worse. What we are witnessing now are the early stages of a battle over who will control the metaverse.

There are criticisms that the metaverse companies are trying to lure in investors with what is at present merely a purely speculative, and over-hyped concept based on existing technology. They are accused of misrepresenting the largest limitation for wide-scale adoption of the metaverse, which comes from technological limitations with current devices and sensors needed to interact with real-time virtual environments.

And undoubtedly, the metaverse will introduce whole new sets of problems, which will raise new ethical and legal questions. There already is a company that sells tailor-made human digital servants. What about digital slavery and prostitution? What about virtual affairs? One problem that is often mentioned is that of currencies: will you be able to use existing ones, or will new ones be created? Will these virtual currencies be usable in the real world (as in, have purchasing power) or will those be limited to specific environments and providers? Many new solutions will have to be found.

How is the metaverse relevant for lawyers?

In a previous article, we talked about the two sides of legal innovation: one side has to do with adopting new technologies for better legal service delivery; the other side has to do with coming up with new legal solutions for new situations. Both aspects apply to the metaverse.

We already mentioned above that there are multiple concerns about the legal aspects of the metaverse. What existing rules can be applied and what new rules are needed? What new solutions do we have to come up with to deal with the abovementioned concerns? Will the metaverse create a whole series of new crimes? All of these are new problems that will need new legal solutions. And hopefully, we will learn from the mistakes that were made with the Internet, where legislation and jurisprudence were lagging far behind in addressing the new problems that arose. If not, the gap between new problems and the needed legal solutions to address them will be even bigger for metaverse.

The other side of the relevance for lawyers is how it will affect the daily operation of law firms. The metaverse with its new technologies will change the way lawyers work. We can expect an increase in and enhancement of virtual offices, where receptionists and paralegals could be bots or avatars of real people. We will see new virtual courtrooms, virtual arbitration, etc. During litigation, experts and lawyers could provide 3D recreations and presentations of their arguments and findings…

In short, the metaverse is expected to open up a whole new world of possibilities, concerns, and issues.

 

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