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

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. Besides the United States and Hong Kong, there are also many other countries or regions around the world that have developed relatively complete stablecoin regulatory frameworks.

In this article, the encryption salad team 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 thinking logic, combined with the blockchain project experience of the encryption salad team, we will outline the regulatory frameworks for stablecoins in each of these three.

This article will analyze the regulatory framework for stablecoins from the following perspectives: regulatory process, normative 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 normative documents

2. Corresponding regulatory authorities

3. Main contents of the regulatory framework

a. Definition of stablecoin

b. The access threshold for the issuer

c. The mechanism for stabilizing the coin value and maintaining reserve assets

d. Compliance requirements for circulation links

e. Special regulatory rules for important ART

(2) United Arab Emirates

1. Regulatory process and normative documents

2. Corresponding regulatory authorities

3. Main content of the regulatory framework

a. Definition of stablecoin

b. The access threshold for the issuer

c. The mechanism for stabilizing the value of the coin and maintaining reserve assets

d. Compliance requirements in the circulation link

(3) Singapore

1. Regulatory process and normative documents

2. Corresponding regulatory authorities

3. Main Content of the Regulatory Framework

a. Definition of stablecoin

b. The access threshold for issuers

c. The mechanism for stabilizing coin value and maintaining reserve assets

d. Compliance requirements in the circulation link

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

1. European Union

1. Regulatory Progress and Normative Documents

The European Union 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, addressing issues such as regulatory fragmentation among member states.

The relevant rules regarding the issuance of stablecoins in the MiCA legislation officially took effect on June 30, 2024, and all companies subject to these rules should now fully comply with the related regulations.

2. Corresponding Regulatory Authority

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

The regulatory authorities of the member country where the stablecoin issuer is located also have some regulatory power over the stablecoin issuer.

3. Regulatory Framework and Main Content

a. Definition of stablecoin

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 clearly states that the functions of EMT are very similar to those defined for electronic money in Directive 2009/110/EC. Like electronic money, EMT is essentially an electronic substitute for traditional fiat currency and can be used for payments and other everyday scenarios.

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 currencies referenced. Article 19 of the MiCA Regulation elaborates on 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 claim against the issuer of electronic money and possess the contractual right to redeem the value of the electronic money held at face value at any time. This means that the redemption capability of EMT is absolutely guaranteed by statutory claims.

In comparison, ART does not necessarily grant its holders a claim against the issuers of such encryption assets, and therefore may not fall under the jurisdiction of Directive 2009/110/EC. Some ARTs do not grant their holders a claim to the par value of the reference currency, nor impose restrictions on redemption periods. If ART holders do not have a claim against their issuer, or if their claims do not match the par value of the reference currency, the holders' confidence in this stablecoin may be shaken.

The following analysis regarding the normative level will also be elaborated from the two dimensions of ART and EMT.

Regarding algorithmic stablecoins, the MiCA regulation has not included algorithmic stablecoins in the regulatory framework for stablecoins. Since algorithmic stablecoins do not have a clear reserve tied 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 on algorithmic stablecoins is very similar to the policy direction in places like the United States and Hong Kong. This also shows 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. Access Threshold for Issuers

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

• The first type is a legal entity or other business that has been established in the European Union and has been authorized by the competent authorities of its member states in accordance with Article 21 of the MiCA Act. If a business wishes to apply for authorization from the relevant authorities, the application should include: issuer's address, legal entity identifier, articles of incorporation, business model, legal opinions, and other relevant information and documents.
• The second type is a credit institution that meets Article 17 of the MiCA Regulation. Article 17 of the MiCA Regulation clearly states that the credit institution needs to provide various relevant documents to the competent authorities within 90 days: operating plan, legal opinion, token governance arrangements, etc.

However, MiCA also adds provisions for exemptions regarding the qualifications of issuers. When an issuer meets any of the following conditions, they can be exempted from the qualifications 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 currency within one year;

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

Although the MiCA regulation exempts the qualification requirements for the above two types of ART issuers, it does not mean that they are not subject to any regulation. In fact, the ART issuer still needs to draft an encryption asset white paper in accordance with the relevant provisions of Article 19 of MiCA and notify the competent authorities of its home member state, completing the filing.

(The above image is the original text of the relevant provisions of Article 16.2 of the MiCA Act)

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 authority on a quarterly basis:

The number of holders, the value of issued ART, the scale of asset reserves, the average daily trading frequency of ART and the average trading amount for that quarter, etc.

Finally, the "MiCA Regulation" also clarifies the own funds requirements for all ART issuers. The own funds that ART issuers should always possess must be greater than or equal to the highest value 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 fixed management fees from the previous year.

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

The average circulating value does not exceed 5,000,000 euros, or is issued and circulated only to qualified investors. The issuer of ART can be exempt from the requirements for issuer qualifications, 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 issuers of ART under the MiCA regulation, complete the corresponding authorization application, and submit the relevant materials.

If the issuer of ART has an average circulation value exceeding 100,000,000 euros, they must fulfill additional reporting obligations while meeting the issuer qualification requirements.

All ART issuers, regardless of the average circulation value of their tokens and the issuing group, must have sufficient own funds.

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

c. Stability Mechanism of Coin Value and Maintenance of Reserve Assets

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

I. Able to cover the risks associated with assets linked to ART;

II. And it can address the liquidity risks associated with the permanent redemption rights of 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 risk 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 rather designates the European Banking Authority to supervise and draft relevant technical standards to further clarify the requirements for reserve assets and liquidity.

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

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 may use part of the reserve assets for investments, but such investments must meet the following conditions:

I. The investment target is a high liquidity financial instrument 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 at the time of exit should be minimized.

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

d. Compliance in Circulation Link

First, Article 39 of the MiCA Act clearly stipulates that ART holders shall have the right to initiate redemption from the issuer of ART at any time. Moreover, ART shall be redeemed based on the market price of the reference asset as requested by the holders. At the same time, the issuer of ART shall formulate 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 Regulation 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 shall immediately cease further issuance of 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 below the aforementioned standards.

This means that the "MiCA Regulation" sets a hard upper limit on the circulation of the ART token, establishing a ceiling that cannot be exceeded by ART under any circumstances. This rule is also designed to avoid the potential internal liquidity risks that may arise from an excessively high circulation of ART.

e. Special Regulatory Rules for Important ART

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

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 scale of this ART is greater than 5,000,000,000 euros;

III. The average daily trading volume and average daily total value of this ART exceed 2.5 million transactions and 500,000,000 euros, respectively.

The last four criteria are related to certain characteristics of 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 are of 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 has also issued other ARTs, EMTs, or provided at least one encryption asset service (Crypto-Asset Service).

When an ART meets at least three of the above seven criteria, the European Banking Authority shall classify the ART as significant. The regulatory responsibility 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 conducted 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 must bear additional obligations, including but not limited to:

I. Important ART issuers should adopt and implement remuneration policies that promote 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 asset-backed tokens. To this end, issuers of important asset-backed tokens should establish, maintain, and implement liquidity management policies and procedures;

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

A Brief Analysis of the Regulations Related to EMT in the MiCA Act

EMT ( Electronic Money Tokens ) have stricter admission thresholds and qualification requirements for issuers compared to ART, as only certified electronic money institutions ( Electronic Money Institution, EMI ), or credit institutions can legally issue EMT under the MiCA Act. At the same time, EMT issuers are also required to draft a cryptocurrency white paper and notify the regulatory authorities about that white paper.

In addition, the regulatory requirements of the MiCA bill regarding the maintenance and management of reserve assets for EMT issuers are quite similar to the relevant regulations for ART issuers, with many overlaps, which will not be analyzed here.

2. United Arab Emirates

1. 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. Specification Document

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

3. Regulatory Authorities

The United Arab Emirates is a federal state composed of seven autonomous emirates. Notable emirates include 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 "Regulations on Payment Token Services" and is directly responsible for the supervision of 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 of the UAE: DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market).

Both have independent legal regulatory systems and corresponding regulatory agencies, thus not being directly governed by the Central Bank of the UAE.

This "federal - emirate" dual-track regulatory system ensures unified regulation of stablecoin issuance at the federal level, guaranteeing the robust development of the stablecoin industry, while also leaving room for institutional innovation and exploration in the financial free zone. Similarly, compared to the chaotic and disorderly regulatory system for encryption assets in the United States — with the SEC, CFTC, and Fed taking turns to intervene, leading to 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 term "Payment Token". For the sake of consistency in the text, it will also be referred to as "stablecoin" hereafter.

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

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

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

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

In addition, this regulation clearly defines in Article 4 which tokens are not classified as stablecoins under this regulation.

1. Exemption Based on Token Type: Tokens used for reward programs, or points-type 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.
2. Exemption 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.
3. Compared to the detailed tiered regulatory model of the EU's MiCA Regulation, this regulation's approach to stablecoin supervision is more concise.

It should be noted that this regulation not only standardizes 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. Access Threshold for Issuers

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

• Legal Form Requirement:
• 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. Stablecoin value stabilization mechanism and maintenance of reserve assets

• First, the stablecoin issuer must establish an effective and robust system to protect and manage reserve assets, and ensure:
• Reserve assets are used only for specified purposes;
• Reserve assets are protected from operational risks and other related risks;
• Reserve assets shall be protected in all circumstances from claims by other creditors of the issuer.

Secondly, the stablecoin issuer must deposit 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 reserves of the stablecoin issuer must be at least equal to the total face value of the fiat currency of the stablecoins in circulation, which means that adequate reserves must be 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, thereby ensuring the consistency between the book value and the actual value of the reserve assets.

The issuer of stablecoins needs to hire an external audit team for monthly audits and ensure the independence of that audit team — the audit team has no direct association with the stablecoin issuer. The third-party audit team will confirm that the value of the reserve assets is not less than the fiat currency equivalent of the stablecoins in circulation. It can be seen that the auditing requirements for reserve assets in this regulation are relatively high. Currently, the largest stablecoin USDT's issuer, Tether, only conducts quarterly audits and does not meet the requirements for audit transparency 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 discusses the compliance of the circulation of stablecoins from the following perspectives:

[Only stablecoins that serve as payment tools are recognized; interest-bearing stablecoins are not acknowledged]

First of all, this regulation clarifies that stablecoins must not pay any interest or other benefits to customers related to the holding time. 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 norm is also in line with the mainstream regulatory positions in various regions.

[Unlimited Redemption of Stablecoins]

Secondly, stablecoin holders can redeem their stablecoins for the corresponding fiat currency at any time without restrictions. The stablecoin issuer must clearly specify the redemption conditions and related fees in the customer agreement. Additionally, the stablecoin issuer cannot charge unreasonable redemption fees beyond reasonable costs.

[Anti-Terrorist Financing and Anti-Money Laundering Requirements]

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

Generally speaking, the anti-money laundering / counter-terrorism financing responsibilities required for stablecoin issuers will directly apply to the relevant regulations in the country. For example, stablecoin issuers in Hong Kong are also required to comply with the relevant provisions of the Hong Kong Anti-Money Laundering Ordinance. Essentially, this 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 develop 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 agencies approved by the central bank;
• Court;
• Or other government agencies with access privileges.

3. Singapore

1. Regulatory Process

In December 2019, the Singapore authorities introduced the Payment Services Act, which clarified the definition of Payment Services Providers, entry thresholds, corresponding licenses, and other relevant 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 published 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, used for the payment of goods or services or for the settlement 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 to replace the expression "payment token" in the following text.

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

b. Access Threshold for Issuers

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 stablecoin issuers must be no less than 50% of annual operating expenses or 1 million Singapore dollars.

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

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

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

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

First of all, the reserve assets of the issuer of the stablecoin can only consist of the following low-risk and 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: sovereign governments, central banks, or international institutions rated 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, which does not impose 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 stablecoin issuers must be higher than the circulation scale of the stablecoin to ensure adequate reserves.

d. Compliance requirements in the circulation link

Stablecoin issuers are required to assume the legal redemption obligation. Stablecoin holders can freely redeem their stablecoins, and the stablecoin issuer must redeem the holders' stablecoins at face value within five working days.

The views expressed in this article are solely those of the author and do not constitute legal advice or opinions on specific matters.