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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 This approach avoids trying to fit stablecoins into outdated categories like securities or commodities and instead regulates them on their own terms.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

An introduction to stablecoins for lawyers

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Stablecoins are in the news on a daily basis. Major banks are considering releasing their own stablecoins. Governments have started regulating them. On 18 July 2025, the US government, e.g., signed a law to create a regulatory regime for dollar-pegged stablecoins. So, this is the first of two articles on stablecoins. In this article, we answer the following questions: What are stablecoins? Why do they matter? What are the different types of stablecoins? And how do they relate to other cryptocurrencies? In the next article, we will then focus on the legal aspects of stablecoins.

What are stablecoins?

Wikipedia describes a stablecoin as “… a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency.”

So, what are we talking about? Stablecoins are a category of digital assets that are specifically designed to maintain a stable value. They achieve this by being pegged to a reference asset, typically a fiat currency like the US dollar or euro. Traditional cryptocurrencies such as Bitcoin or Ethereum are known for their price volatility. Stablecoins on the other hand aim to offer the benefits of blockchain technology, such as fast, borderless, and programmable transactions, but without the associated price fluctuations.

Why do they matter?

Stablecoins have become the backbone of many digital asset transactions. They offer the benefits of cryptocurrency, like speed, low cost, and global reach, while avoiding its biggest flaw: volatility. With stable value, they make it possible to trade, lend, borrow, and transfer money on blockchain platforms without worrying about large price swings. This makes them attractive not just to crypto users, but also to businesses, fintech companies, and even central banks.

Stablecoins are already widely used on cryptocurrency exchanges as quote currencies (e.g., USDT or USDC pairs). They enable traders to move in and out of volatile assets without relying on fiat bank transfers. In cross-border payments, stablecoins enable near-instant remittances with lower fees compared to traditional money transfer services. This is especially the case in regions with unstable banking systems. Additionally, stablecoins are used for borrowing, lending, and staking. They allow users to earn interest or participate in decentralized governance while maintaining exposure to a relatively stable asset. They have also become critical tools for avoiding capital controls and hyperinflation in countries with unstable currencies.

Let’s put things in perspective: in 2024, over 70% of trading volume on major cryptocurrency exchanges was settled using stablecoins. Beyond trading, stablecoins are now used for cross-border payments, employee payroll, and remittances. Some stablecoins are accepted by merchants and payment processors, integrating them into the real economy. Stablecoins have even seen growing use in countries with unstable currencies, where they serve as a hedge against inflation. This trend is expected to grow, especially in emerging markets.

Notably, the total supply of stablecoins has grown significantly: as of mid-2025, the combined market capitalization of major stablecoins exceeds 150 billion USD.

What are the different types of stablecoins?

Wikipedia mentions 3 different types, but the literature mentioned in the sources below also discuss a fourth one. They can be grouped into distinct types based on how they maintain their price stability. Each of these approaches reflects a different mechanism for achieving price parity with a target asset.

Fiat backed

Fiat-collateralized stablecoins are backed 1:1 by reserves held in traditional financial institutions. These reserves can include bank deposits, short-term government securities, or other low-risk instruments. When a user purchases a stablecoin, the issuer stores an equivalent amount of fiat currency in reserve. Examples of this type include USD Coin (USDC), Tether US (USDT) and Tether EU (EURT). These coins are generally considered the most stable, though they rely heavily on the trustworthiness and transparency of the issuer. Concerns over reserve backing have occasionally led to regulatory scrutiny, particularly in Tether US’ case. For example, in 2021, the US Commodity Futures Trading Commission (CFTC) fined Tether $41 million for misleading statements about its reserves.

Cryptocurrency backed

Crypto-collateralized stablecoins are backed by other cryptocurrencies rather than fiat. These stablecoins are typically overcollateralized to account for the volatility of their underlying assets. A prominent example is DAI, which is issued by the MakerDAO protocol and backed by Ethereum and other assets deposited in smart contracts. Users lock up collateral that exceeds the value of the DAI issued, helping to maintain its dollar peg. This model removes the need for centralized custodians but introduces complexity and vulnerability during market downturns, as seen in March 2020 when rapid price drops led to liquidations within the Maker system.

Algorithmic stablecoins

Algorithmic stablecoins use smart contracts and market incentives to maintain a peg without relying on collateral. Instead of being backed by assets, these coins regulate supply algorithmically. When the price drops below the peg, the protocol may reduce supply by incentivizing users to burn coins. If the price rises above the peg, new coins are minted. This model is theoretically elegant but has proved highly unstable in practice. The most notorious failure in this category was TerraUSD (UST), which lost its peg in May 2022 and collapsed entirely, wiping out over $40 billion in market value. This event highlighted the systemic risks algorithmic stablecoins pose when trust and liquidity disappear.

Commodity backed

In addition to these main types, a niche category exists for commodity-backed stablecoins. These are pegged to physical goods such as gold or oil. Paxos Gold (PAXG), for example, is backed by physical gold stored in London vaults, allowing users to own fractionalized gold on the blockchain. These stablecoins combine the technological advantages of digital tokens with the perceived safety of tangible assets.

How they relate to other cryptocurrencies

In the broader ecosystem of cryptocurrencies, stablecoins play an essential role. Traditional cryptocurrencies like Bitcoin are often used as speculative assets or long-term stores of value (sometimes called “digital gold”). Stablecoins on the other hand serve as more practical tools for day-to-day transactions, on-chain liquidity, and as units of account within decentralized finance (DeFi) platforms. Their price stability makes them an ideal medium for settling trades, providing collateral, and earning yield in lending protocols. So, they function as a much needed bridge between volatile cryptocurrencies and traditional financial systems, as they allow users to store and transfer value on blockchain networks with a degree of price predictability.

 

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