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Regulation of Stablecoins Worldwide: Europe and Ukraine

As of the end of October 2023, the total market capitalization of stablecoins has exceeded $124 billion, and in 2022, the volume of transactions in these assets nearly equaled that of Visa.

The active use of "stablecoins" has attracted the attention of regulators to this segment. The Financial Stability Board has presented recommendations for its control, and many countries are developing their own standards for stablecoins.

Incrypted, in collaboration with Juscutum experts, has examined the regulatory landscape of the stablecoin sector in different countries around the world. In the first installment of this series, we explore the current regulatory landscape in European countries and Ukraine.

MiCA and Stablecoins

The Regulation on Markets in Crypto Assets (MiCA) will apply throughout the European Union. MiCA provides a legal framework for virtual assets, markets, and service providers that are not yet regulated at the EU level. The regulation will enable the provision of licensed services and conducting ICOs in the EU through a single passporting system.

MiCA categorizes virtual assets into several categories. Stablecoins, depending on their characteristics and collateral, can be qualified as electronic money tokens or asset-backed tokens.

In June 2023, MiCA came into effect, but its provisions will be gradually applied.

Important Note: Provisions regarding asset-backed tokens and electronic money tokens (stablecoins) will come into effect from July 2024, and provisions concerning issuers and service providers will be applicable from January 2025.

Electronic Money Tokens

To conduct an initial offering or to be admitted to trading within the EU, authorization as either a credit institution or an electronic money institution is required. Applicants must submit a white paper to the competent authority and publish it in accordance with Article 51 of the Regulation.

Additionally, requirements are established for cases where electronic money tokens qualify as "significant" under Article 56 of the Regulation. These requirements include obligations related to the establishment, maintenance, and implementation of asset storage policies, asset reserve implementation, compliance, and independent auditing.

Asset-Backed Tokens

To conduct an initial offering or admit such virtual assets to trading within the European Union, an authorization procedure through the competent authority of an EU member state or having the status of a credit institution will be required.

However, these conditions will not apply when:

  • The total offering of asset-backed tokens does not exceed €5 million (or a lower amount if determined by the respective EU member state) or the equivalent in another currency within 12 months.
  • The offering is exclusively directed at qualified investors, and only they can possess the tokens.

In such cases, there is no need for authorization, but it is necessary to prepare a white paper and notify the competent authority of the EU member state.

Additionally, requirements are established for cases where asset-backed tokens qualify as "significant" under Article 43 of the Regulation. These requirements include obligations related to the development and implementation of compensation and recovery policies, compliance with custody conditions, liquidity assessment, and stress testing.

Providers of Virtual Asset Services

A provider of virtual asset services, or CASP, is defined as "any person whose business or activity is to provide one or more services related to virtual assets to third parties on a professional basis." Services related to virtual assets include:

  • Storage and administration of virtual assets on behalf of clients.
  • Operating a virtual asset trading platform.
  • Exchange of virtual assets for fiat money.
  • Exchange of virtual assets for other virtual assets.
  • Execution of orders for virtual assets on behalf of clients.
  • Placement of virtual assets.
  • Provision of virtual asset transfer services on behalf of clients.
  • Receipt and transmission of orders for virtual assets on behalf of clients.
  • Provision of virtual asset consultation services.
  • Portfolio management of virtual assets.

As a result, such entities will have obligations to meet specific requirements, including obtaining a license, having a registered office in the EU, complying with high organizational requirements, having insurance coverage, adhering to the processing and storage of clients' personal data, and having minimum capital requirements ranging from €50,000 to €150,000, depending on the type of services, and more.

However, until the provisions of the unified regulation are enforced, EU countries regulate stablecoins differently.

Germany

Regulation of Stablecoins

The main acts regulating virtual assets (VA) in Germany are the Anti-Money Laundering Act and the Banking Act. According to the Banking Act, stablecoins are defined as VAs and are typically classified as units of account.

License Name and Characteristics

Germany does not have a special regulatory regime for the issuance of virtual assets. General financial regulation rules apply to them if tokens qualify as financial instruments.

Issuing stablecoins usually does not require licensing. It is also typically not necessary to publish a prospectus for issuance, as "stablecoins" are not considered securities or investment instruments.

For professional trading of stablecoins on the secondary market, depending on the type of activity, a license may be required for:

  • Financial commission business.
  • Operating a trading system.
  • Investment brokerage.
  • Contract brokerage.
  • Portfolio management.
  • Proprietary trading.
  • Deposit business.

Additionally, the provisions of the Anti-Money Laundering Act apply, which establish obligations for authorizing virtual asset service providers, user identification, monitoring customer relationships for signs of money laundering, reporting suspicious activities, and more.

Scope of License

In cases where financial legislation provisions apply, the principle of "passporting" activities allows businesses to operate within the EU.

If licensing does not apply, an analysis of the legislation in individual EU member states is required to determine whether there are regulatory rules for offering VAs to their residents.

Other

The German regulator actively provides clarifications regarding potential obligations related to the issuance of virtual assets and obtaining the necessary permissions, taking individual facts and circumstances into account.

France

Regulation of Stablecoins

The main act regulating virtual assets in France is the "PACTE" law (Loi PACTE), which focuses on the development and transformation of businesses. It categorizes VAs into two subcategories:

  1. Utility tokens, which are non-material assets that represent one or more rights in digital form and can be issued, recorded, stored, or transferred via blockchain, allowing for the direct or indirect identification of the asset's owner. The key concept here is the representation of a right to access a service or technology.
  2. Cryptocurrencies, which are any digital representations of value that are not issued or guaranteed by a central bank or government authority, are not necessarily linked to legal tender, do not have the legal status of money, but are accepted by physical or legal entities as a medium of exchange and can be transmitted, stored, or traded electronically. This applies to VAs that serve as a means of exchange but do not necessarily represent a right to access a service or technology.

The qualification of virtual assets is formal, as the French Financial Markets Authority (AMF) assesses the asset in each case. Stablecoins may be qualified as VAs and fall under a special regime for the regulation of virtual assets if they are neither financial instruments nor electronic money.

However, the French banking regulator, in turn, believes that stablecoins, especially those pegged to fiat currency, should be classified as electronic money, which can lead to legal conflicts.

License Names

The PACTE law establishes two different regimes: one for virtual asset service providers (DASP) and one for initial offerings, covered by mandatory registration, optional licensing, or a visa.

Mandatory registration is required for virtual asset service providers offering services 1-4:

  • Exchange of VAs for fiat currency.
  • Exchange of VAs for other virtual assets.
  • Operating a platform for trading VAs.
  • Receipt and transmission of orders for VAs.
  • Portfolio management of VAs.
  • Financial consultation regarding VAs.
  • Underwriting VAs.
  • Guaranteed placement of VAs.
  • Unguaranteed placement of VAs.
  • Optional licensing is for service providers offering all the listed services, including those subject to mandatory registration. Such a license allows for marketing through any means, including direct offerings and sponsorship.

For initial token offerings (ICOs), a visa regime applies, which also allows the issuer to market using any means, including direct offerings and sponsorship. Consequently, ICOs without a visa are legal in France.

Scope of License

The licensing regime for virtual asset service providers applies to entities that:

  • Provide services in France and to customers residing in France.
  • Are located in France and provide services, regardless of the location of the recipients.

The ICO regime applies to initial offerings of virtual assets conducted in France. An analysis of the legislation in other jurisdictions must be conducted to determine the presence or absence of regulatory rules for offering VAs to their residents.

Other

While the regulation regime for virtual assets provides for optional licensing for certain types of service providers and issuers, the absence of a license or visa significantly limits the marketing activities of such entities.

Spain

Regulation of Stablecoins

There is no unified legislation specifically governing virtual assets in Spain.

Virtual assets are defined as a digital representation of an asset or right that can be transferred or stored electronically using distributed ledger technology or similar technologies. There is no specific definition for stablecoins.

Virtual assets are not considered legal tender.

Regulatory provisions regarding virtual assets are contained in Royal Decree-Law 7/2021 of April 27, which implements the EU's Fifth Anti-Money Laundering Directive (5MLD), and Circular 1/2022 of the National Securities Market Commission on the advertising of virtual assets presented as investments.

Virtual assets may be considered securities if they have the characteristics and features of securities, and primary offerings may be subject to the registration requirements of Spain's "Stock Market Law" regarding the registration of a prospectus for the issuance of securities.

Depending on their characteristics, virtual assets may also be considered commodities and subject to regulation under the provisions of the Civil and Commercial Codes.

License Name and Characteristics

Royal Decree-Law 7/2021 requires registration with the Bank of Spain for virtual currency service providers and electronic wallet service providers.

Registration for these companies requires compliance with the implementation of measures and procedures to prevent money laundering and terrorist financing, as well as requirements of business integrity and professionalism. There are no specific procedures for authorizing initial offerings of virtual assets.

Scope of License

The licensing regime for virtual currency service providers applies to economic operators that:

  • Provide services in Spain.
  • Are located in Spain and provide services, regardless of the location of recipients.

In the absence of ICO licensing in Spain, an analysis of the legislation of other jurisdictions should be conducted to determine the presence or absence of regulatory rules for conducting a public offering of virtual assets to their residents.

Other

Spain has adopted the "Law 7/2020 on the Digital Transformation of the Financial System," which provides for the creation of a test space for innovative projects, including those related to Web3, subject to administrative supervision.

According to the terms, pilot projects will be selected, supervisors will be appointed to oversee them, and, if the testing is satisfactory, licenses will be issued for the chosen activities.

Poland

Regulation of Stablecoins

The definition of virtual assets is presented in the Anti-Money Laundering Act, implementing the Fifth EU Anti-Money Laundering Directive (5MLD). Virtual assets represent a digital representation of value that is exchangeable for legal tender, accepted as a medium of exchange, can be stored or transmitted electronically, or can be the subject of electronic commerce, and are not: Legal tender issued by national or foreign central banks or other state authorities.

  • An international settlement unit established by an international organization and accepted by individual countries within that organization or cooperating with it.
  • Electronic money.
  • A financial instrument.
  • A bill of exchange or a check.

There is no specific definition or regulation for stablecoins. Consequently, the general regulatory regime is applied in the absence of the above characteristics and features of other instruments.

License Name and Characteristics

Providers of virtual currency services have specific obligations and limitations under the Anti-Money Laundering Act and must be entered into the register of businesses conducting activities related to virtual assets, which is under the supervision of the Ministry of Finance.

The Anti-Money Laundering Act designates entities conducting business related to:

  • Exchange between virtual currencies and payment funds.
  • Exchange between virtual currencies.
  • Intermediation in such exchanges.
  • Maintenance and servicing of virtual currency accounts.

Generally, ICOs are allowed in Poland and do not require authorization or licensing, as there are no legislative provisions that explicitly prohibit such offerings.

The only official document issued by a state agency is a statement from the Polish Financial Supervision Authority (KNF) regarding the issuance and sale of virtual assets.

In this statement, the KNF highlights the risks associated with investing in ICOs and emphasizes that each VA offering should be assessed individually, with questions regarding the qualification of tokens and the applicable law directed to the KNF.

Thus, ICOs may be subject to various legal requirements if tokens qualify as financial instruments, including the preparation of a prospectus for a public offering and compliance with investor protection provisions.

Scope of License

The licensing regime for virtual asset service providers applies to economic operators that:

  • Provide services in Poland.
  • Are located in Poland and provide services, regardless of the location of recipients.

At the time of publication, advertising and marketing of virtual assets in Poland are not legislatively regulated. Therefore, advertising VA should primarily be considered from the perspective of general advertising law principles.

Lithuania

Regulation of Stablecoins

Lithuania does not have specialized legislation concerning virtual assets, including stablecoins.

The primary regulatory provisions are outlined in the "Anti-Money Laundering and Counter-Terrorist Financing Act," which defines virtual assets as a digital representation of value that:

  • Does not have legal currency or money status.
  • Is not issued or guaranteed by the central bank or any other government authority.
  • Is not necessarily tied to a currency but is accepted by individuals or legal entities as a means of exchange, and can be transferred, stored, and traded electronically.

There is no separate definition or regulation for stablecoins. As a result, the general regulatory framework is applied.

License Name and Characteristics

Currently, providers of virtual asset services are required to submit a "notification." This notification takes the form of a statement to the Registrar of Legal Entities, indicating their intent to engage in virtual asset activities and confirming that the members of their governing bodies and beneficiaries are familiar with the legislation on the prevention of money laundering and terrorist financing and adhere to its provisions.

There are two types of virtual currency-related activities that require notification:

  • Virtual Currency Exchange Operator: Provides services related to the exchange, purchase, and/or sale of virtual assets for remuneration.
  • Virtual Currency Custodial Wallet Operator: Provides services related to managing custodial wallets for virtual assets on behalf of clients.

Initial Coin Offerings (ICOs) are generally allowed in Lithuania since there are no legislative provisions that explicitly prohibit such offerings.

However, the Bank of Lithuania, in its position on virtual assets and initial token offerings as of January 22, 2022, notes that depending on the characteristics, virtual assets may have features of financial instruments.

The regulator also pointed out that the entities issuing, holding, or acting as intermediaries in transactions involving such assets may be subject to prospectus requirements and the obligations of financial services legislation.

Scope of the License

The licensing regime for providers of virtual asset services applies to business entities that:

  • Provide services within Lithuania.
  • Are located in Lithuania and provide services both within Lithuania and in other jurisdictions.

A mandatory requirement regarding these activities is that virtual currency exchange operators and virtual currency custodial wallet operators should not engage in activities or provide services to such an extent in another state that only non-essential functions remain in Lithuania or services are provided exclusively to customers in another state, or services are not provided in Lithuania.

Other Considerations

Activities related to virtual assets are not compatible with providing financial and payment services or the operation of collective investment institutions. The Bank of Lithuania emphasizes that these types of activities should be separated from virtual asset services, and all market, credit, operational risks, and liquidity risks should be borne by third parties.

Latvia

Regulation of Stablecoins

Latvia does not have specialized legislation for virtual assets, including stablecoins.

The primary regulatory provisions are outlined in the "Law on the Prevention of Money Laundering and Terrorist Financing," which defines virtual assets as a digital representation of value that can be transmitted, stored, or traded in digital form and can function as a means of exchange but is not legal tender, not recognized as banknotes and coins, non-cash money, or electronic money.

There is no specific definition or regulation for stablecoins in Latvia, and the general regulatory framework is applied.

License Name and Characteristics

The "Law on the Prevention of Money Laundering and Terrorist Financing" establishes that a provider of virtual asset services is an entity that:

  • Provides services related to virtual assets, including service providers for the exchange of virtual assets issued by other entities.
  • Offers users the opportunity to exchange virtual assets for other virtual assets while receiving a commission.
  • Facilitates the purchase and sale of virtual assets using recognized legal means of payment.

Providers of virtual asset services are obligated entities according to the "Law on the Prevention of Money Laundering and Terrorist Financing," and they have specific obligations related to customer identification, monitoring of customer relationships for signs of money laundering, reporting of suspicious activities, and more.

Depending on their business model and the ways virtual assets are used, issuers and/or service providers may be subject to existing financial and electronic money legislation in Latvia.

ICOs are generally permitted in Latvia and do not require authorization or licensing, as there are no legislative provisions that directly regulate them.

On the other hand, ICOs may be subject to various legal requirements if tokens qualify as financial instruments, including the need to prepare a prospectus for a public offering and compliance with investor protection provisions.

There are no specific rules in Latvia applicable to the advertisement of virtual assets unless they are classified as financial instruments.

Scope of the License

Providers of virtual asset services can offer their services in Latvia. An analysis of the legislation of other jurisdictions should be conducted to determine whether regulatory rules exist for providing services to their residents.

Other Considerations

The Bank of Latvia supports innovation in the financial system, which includes virtual assets.

The regulatory sandbox provides participants in the financial market the opportunity to test and verify the compliance of innovative services with regulatory requirements according to a testing plan approved by the Bank.

Estonia

Regulation of Stablecoins

The primary regulatory provisions are contained in Estonia's "Prevention of Money Laundering and Terrorist Financing Act." According to this act, virtual assets (VAs) are defined as a digital representation of value that can be transmitted, stored, or sold in digital form and is accepted by natural or legal persons as a payment instrument but is not legal tender.

The Estonian Financial Supervision Authority (EFSA) defines stablecoins as a type of virtual asset based on distributed ledger technology (DLT) and with a stable value, typically backed by a specific asset or algorithm.

There is no separate regulation for stablecoins, and the general regulatory framework is applied.

License Name and Characteristics

Providers of virtual asset services must obtain authorization from the Financial Intelligence Unit (FIU) to conduct activities involving virtual assets.

Virtual asset services include:

  • Virtual asset wallet - involving the storage of encrypted customer keys for the purpose of holding, managing, and transferring virtual assets.
  • Virtual asset exchange.
  • Virtual asset transfer - a service enabling at least partially electronic transfers through a service provider on behalf of the sender to the wallet or account of the recipient, whether or not the sender and the recipient are the same person or both use the services of the same service provider.
  • Organizing a public offering or sale or providing related financial services on behalf of the issuer related to the issuance (issuance) of virtual assets.

ICOs conducted on their own behalf are generally allowed in Estonia and do not require authorization or licensing since there are no legislative provisions directly regulating such offerings.

However, before conducting an ICO, the Estonian Financial Supervision Authority recommends conducting a legal analysis to determine the characteristics and attributes of the specific virtual asset.

Stablecoins backed by fiat currency may qualify as electronic money under the "Payment Institutions and E-money Institutions Act," which requires issuers of such currencies to be authorized as e-money institutions.

Similarly, stablecoins could be classified as securities under the "Securities Market Act," requiring compliance with prospectus issuance and investor protection provisions.

Depending on the structure and purpose of the ICO, other requirements under the "Investment Funds Act" may also apply.

Scope of the License

The licensing regime for providers of virtual asset services applies to business entities that:

  • Provide services within Estonia.
  • Are located in Estonia and provide services regardless of the location of recipients.

Other Considerations

The government of Estonia encourages innovation in the financial sector, including virtual assets. The 2022-2025 Strategic Plan of the Estonian Financial Supervision and Resolution Authority includes the introduction of a permit with additional terms and conditions to promote the development of technologically innovative business models, including in the virtual asset sector.

Ukraine

Given Ukraine's candidacy for EU membership, local legislation is being synchronized with the EU's MiCA regulation. The Ukrainian parliament has passed a law intended to regulate the virtual asset market, but it has not come into force and is still under development due to the need to implement MiCA provisions.

Regulation of Stablecoins

The definition of virtual assets is presented in the "Law on the Prevention and Counteraction of Legalization (Laundering) of Illegally Received Income, Financing Terrorism and the Proliferation of Weapons of Mass Destruction." According to this law, a virtual asset is a digital representation of value that can be traded in digital form or transferred and can be used for payment or investment purposes.

Virtual assets are considered objects of civil rights, specifically digital items that exist exclusively in the digital environment and have property value.

The National Bank of Ukraine does not consider virtual assets as a means of payment.

There is no separate definition of stablecoins in Ukrainian legislation. Stablecoins may be classified as virtual assets (digital items) and fall under the general regulatory framework.

License Name and Characteristics

Ukraine does not have a specific regulatory regime or licensing system for activities related to stablecoins and virtual assets.

The implementation of a regulatory regime for virtual assets is expected to occur through the "Virtual Assets Act," which is currently under development and is intended to regulate:

  • The classification of virtual assets.
  • The issuance process.
  • Licensing of providers of virtual asset services and the types of their activities.
  • State authorities' powers in the virtual asset sector.

Scope of the License

As of the time of writing, the issuance of virtual assets and the activities of providers of virtual asset services remain unregulated within Ukraine.

With the implementation of the "Virtual Assets Act," licensing is expected to apply to issuers and service providers that offer services and engage in activities within Ukraine.

Other Considerations

The lack of clear recognition or regulation of virtual assets does not preclude the possibility that such activities may fall under the existing financial legislation, depending on the nature and characteristics of the activities, including:

  • Banking licenses.
  • Licenses for the provision of financial services.
  • Licenses for conducting currency operations.

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