Key Takeaways
Stablecoins are a key use case for blockchain technology, and their regulation could shape future blockchain and distributed ledger technology rules.
Stablecoin regulation began in 2019 with Facebook's Libra project and sped up after Terra UST's collapse in 2022. While regulations may often trail tech advancements, it's crucial for laws on new technologies to be agile and forward-thinking.
There are three types of stablecoins: (1) Real World Asset-Linked, (2) Digital Asset-Backed, and (3) Algorithmic. The first type is the most used and regulated.
Regulation varies by region. The EU, Dubai, and Singapore have introduced frameworks. The UK has opted for a phased strategy that prioritizes thorough analysis and stakeholder engagement.
Forward-thinking stablecoin regulation is essential for creating global frameworks for a more open financial system.
Introduction
Stablecoins have emerged as a revolutionary force in finance, showcasing one of the most practical applications of blockchain technology. These digital assets, designed to maintain a stable value by being pegged to traditional currencies or other assets, are gaining global traction. Their promise of stability, combined with blockchain's efficiency and transparency, may make them a cornerstone in digital finance.
Stablecoins can transform everyday transactions, cross-border payments, and the global financial system. Their growth has led regulators worldwide to create new rules. The goal is to balance innovation with financial stability and consumer protection. Overly strict legislation may stifle innovation, while insufficient oversight could pose risks to consumer safety and financial integrity.
We are witnessing the real-time evolution of stablecoin regulations across various jurisdictions, from larger markets like the U.S. and the EU to to other key players such as Singapore and Dubai. These efforts may be crucial in shaping the future of stablecoins, providing clarity, confidence, and legal certainty to both issuers and users. Furthermore, the way regulation develops with regard to stablecoins may set the tone for future regulation of the blockchain industry as a whole.
The Stablecoin Regulation Timeline
Figure 1: Timeline of global stablecoin regulation
The development of stablecoin regulation may be earmarked by two pivotal developments in the stablecoin space that significantly influenced the global regulatory landscape:
First was the reveal of Facebook’s Libra project (later rebranded to Diem) in 2019. This initiative aimed to create a global digital currency, which caught the attention of regulators worldwide. Libra's potential to disrupt traditional finance and achieve widespread adoption prompted regulators to develop stablecoin frameworks to ensure financial stability and consumer protection.
Secondly, the collapse of TerraUSD (UST) in May 2022 further accelerated the regulatory development process. TerraUSD, an algorithmic stablecoin, saw its market capitalization plummet from nearly US$18.7 billion to virtually zero, causing significant financial losses for many consumers. This event underscored the inherent risks associated with algorithmic stablecoins, which rely on complex mechanisms rather than traditional asset backing to maintain their peg.
In response, regulators around the world have intensified their efforts to establish comprehensive regulations for stablecoins. In the United States, the crash of TerraUSD sparked discussions about banning algorithmic stablecoins entirely, reflecting a broader trend of prioritizing consumer protection. The European Union has prohibited algorithmic stablecoins under the Markets in Crypto-Assets (MiCA) framework and has taken steps to integrate stablecoin regulations into the legislative framework. Meanwhile, countries like Singapore and Dubai have been proactive in crafting detailed guidelines to ensure the safe and transparent operation of stablecoins within their financial ecosystems.
Regulatory efforts are not just about mitigating risks but also about fostering innovation. By providing clear rules and guidelines, regulators aim to create an environment where stablecoins can thrive securely. The journey of stablecoin regulation is a testament to the dynamic interplay between innovation and regulation, highlighting the need for a balanced approach that safeguards consumers while encouraging technological advancement.
The different types of stablecoins
This is one potential (non-exhaustive) classification of the various types of stablecoins currently in existence. It is important to note that different legislative frameworks across various jurisdictions have developed distinct terminologies for the classification of stablecoins.
As of today, it still remains to be seen how the respective judicial bodies will interpret the both new and upcoming legislation, and definitively categorize existing and future stablecoins.
Figure 2: Classification of different stablecoins for illustrative purposes
Fiat-linked stablecoins
Fiat-linked stablecoins are digital assets that are backed by fiat currencies. As of today, this category of stablecoin is the most commonly used, and the most widely regulated. Different jurisdictions employ various terminologies and regulatory frameworks to govern these stablecoins. Generally, the regulation of this category of stablecoin mandates that issuers obtain appropriate licensing, maintain a specified level and composition of reserves, ensure a high degree of transparency, and comply with existing anti-money laundering (AML) and know-your-customer (KYC) regulations.
Figure 3: Different terminology used to describe fiat-linked stablecoins
Asset-backed stablecoins
Today, the largest asset-backed stablecoins are collateralized by a combination of crypto-native assets such as Bitcoin or Ether, and other real world assets. The stablecoin landscape is constantly evolving. Asset-backed stablecoins like DAI, which initially relied solely on digital assets like Ether for collateralization, have diversified their collateral pools to include real-world assets such as U.S. Treasuries. This shift potentially reflects a broader trend towards the integration of ‘crypto-native’ protocols with the traditional financial system, resulting in more hybridized stablecoin models.
This category of stablecoin, which is smaller in market capitalization as compared to the previous category, has received comparatively less regulatory scrutiny to date.
Algorithmic stablecoins
The algorithmic stablecoins of the past purported to maintain their peg via some system of issuance and burning, in order to adjust the circulating supply of the token. Compared to digital asset-backed stablecoins, algorithmic stablecoins were often undercollateralized. This category of stablecoin has all but disappeared since the fall of Terra UST in 2022. As of today, regulators have taken a harsh stance against this type of stablecoin, with both the EU’s Markets in Crypto-Assets (MiCA) regulation and the US’s proposed Lummis-Gillibrand Payment Stablecoin Act placing outright bans on them.
Given the current low market demand for these stablecoins, it may be beneficial to consider a balanced regulatory approach that protects consumers without stifling innovation. While some algorithmic stablecoins have faced significant challenges in the past, a complete ban may limit the potential for new developments and improvements in this space.
An overview of key regulatory players
Outlined in this section are some of the distinguishing characteristics exhibited by regulators at the forefront of stablecoin regulation across various jurisdictions. This table below seeks to offer a high-level comparison of the various stablecoin regulations and regulatory language being implemented across the different jurisdictions.
Figure 4: A comparison of the regulatory language used for stablecoins across 6 different jurisdictions
*Not exhaustive and for illustrative purposes only
European Union
The EU is currently home to a comprehensive and harmonized stablecoin regulation framework, in the form of its Markets in Crypto-Assets (MiCA) regulation, which establishes a uniform legal framework for the issuance and operation of stablecoins across all EU member states. MiCA aims to create a consistent regulatory environment, reducing fragmentation and providing legal clarity for market participants. MiCA covers a wide range of crypto-assets, including stablecoins, and sets out specific requirements for their issuance, governance, and supervision.
Regulatory clarity fosters confidence among entrepreneurs and investors, paving the way for new businesses and innovations. This environment influenced Circle's decision to commit to the region, as highlighted in their State of the USDC Economy 2024 report, which states, "the EU has the core elements in place to become a regulatory champion and market leader for Web3." Following the adoption of the MiCA regulation, Circle has significantly invested in its European operations, designating France as a hub for regional activities. As part of this strategy, Circle intends to fully onshore EURC — its euro-denominated stablecoin — to Europe as a MiCA-compliant e-money token.
The MiCA regulation classifies stablecoins into electronic money tokens (EMTs) and asset-referenced tokens (ARTs).
EMTs are fiat-backed and require issuers to be authorized as electronic money institutions (EMIs) or credit institutions, maintaining liquid reserves for redemption. At least 30% (or 60% for "significant" EMTs) of these funds must be held in separate accounts.
ARTs are backed by multiple assets and need stringent oversight, including authorization and adherence to strict rules on reserve composition and risk management.
Both EMTs and ARTs face trading volume caps of 1 million daily transactions and a total issuance cap of €5 billion for non-EU currencies to mitigate financial stability risks.
MiCA specifies that fully decentralized crypto-asset services are not within its scope, however, DeFi protocols operate with centralized front-ends and intermediaries. A strict interpretation of the legislation could require that these DeFi protocols comply with the same licensing and Know Your Customer (KYC) requirements as traditional financial services firms. This could impose significant burdens that many DeFi protocols may find challenging or be unwilling to meet. This was a concern highlighted by Rune Christensen, founder of MakerDAO (now Sky), which issues the DAI stablecoin, in April of this year.
In May, the cryptocurrency exchange Uphold delisted DAI alongside five other stablecoins, including FRAX and USDT, citing MiCA regulations, which come into full force in December 2024. Around the same time, Binance also divided stablecoins into "regulated" and "unauthorized" coins based on their compliance with the new MiCA rules.
The regulatory certainty provided by MiCA may enhance business confidence and encourage investment within the EU. Maintaining a balance between fostering innovation and achieving regulatory objectives will be essential. While MiCA positions the EU at the forefront of providing legal clarity, its long-term success in setting global standards and stimulating industry growth will depend on effective implementation and supervision.
United States
With the stablecoin industry expanding rapidly and the majority of existing stablecoins being USD-denominated, it is unsurprising that the need for payment stablecoin regulations is becoming a bipartisan concern in Congress. There is growing agreement on the importance of strengthening the dollar, especially as digital currencies gain global traction. This includes support of responsible private-sector innovations that contribute to the stability of the U.S. financial system.
The US regulatory system involves multiple state and federal agencies, which leads to a diverse and complex regulatory landscape. It has both state and federal regulators, creating a patchwork of rules that differ by state. Multiple agencies like the SEC, CFTC, OCC, and Federal Reserve regulate stablecoins, leading to varied interpretations and enforcement compared to more centralized systems.
Although the U.S. does not yet have a unified federal framework for stablecoins, existing regulations still apply. For example, FinCEN treats stablecoins as convertible virtual currency (CVC), making them subject to the Bank Secrecy Act. Unlike the EU’s comprehensive classification of stablecoins under the MiCA legislation, the U.S. approach has primarily involved regulatory interpretation through various agencies and judicial processes. This is currently being explored in ongoing regulatory discussions and legal proceedings.
The US approach - early as it currently is - seems to veer towards placing a comparatively greater emphasis on stablecoin integration with their existing banking system. The pending Lummis-Gillibrand Payment Stablecoin Act has as one of its main aims, the preservation of the dual banking system, authorizing state trust companies to create and issue payment stablecoins up to $10 billion. The Office of the Comptroller of the Currency (OCC) has also taken significant steps to integrate stablecoins into the traditional banking system. In 2021, the OCC issued interpretive letters offering guidance on allowing national banks to issue stablecoins, provided they are fully backed by reserves and comply with applicable laws. The OCC also permits banks to offer custody services for stablecoins, holding reserve assets on behalf of issuers. By recognizing stablecoins as a means of payment, the OCC aims to facilitate faster transactions and greater interoperability between stablecoins and traditional banking services.
United Kingdom
In November 2023, the UK's financial regulatory bodies — the Bank of England, the Financial Conduct Authority (FCA), and the Prudential Regulation Authority — rolled out proposals in its 2023 Discussion Paper for the initial phase of a comprehensive regulatory framework targeting digital assets.
Phase 1 of the framework zeroes in on fiat-backed stablecoins, and does not address commodity-backed or algorithmic stablecoins, which are slated for consideration in Phase 2. The UK is also exploring how to appropriately regulate foreign stablecoins that operate within UK payment systems. The current proposals require that a UK-authorized firm certify such stablecoins as meeting standards equivalent to those of regulated UK-issued stablecoins. This approach contrasts with the EU's requirement that stablecoins offered to the EU public be issued by EU-incorporated entities and comply with local reserve requirements.
The UK’s phased approach to crypto asset regulation offers an alternative strategy compared to the EU’s comprehensive implementation under MiCA. The UK’s approach provides flexibility to adapt regulations over time. The EU’s comprehensive approach, on the other hand, aims to establish a uniform framework which could create consistency and confidence for market participants.
As highly interconnected markets, the UK, UAE, and Singapore should explore integrating foreign-based stablecoins into their regulatory frameworks. Regulatory developments in these regions are particularly significant, as they could contribute to the formation of a globally interoperable stablecoin regulatory landscape. Monitoring the regulatory approaches of the UK, UAE, and Singapore may be crucial for understanding the future direction of stablecoin governance on an international scale.
UAE
In recent years, the UAE has intensified its efforts to become a leader in the virtual assets space, marked by the enactment of the Payment Token Services Regulation by the Central Bank of UAE (CBUAE), effective June 2025. This new framework empowers the CBUAE to oversee stablecoins pegged to the UAE Dirham (AED), previously under the Dubai Virtual Assets Regulatory Authority (VARA).
The regulation defines a Payment Token as a virtual asset maintaining a stable value by referencing the same fiat currency it is denominated in. These tokens, or stablecoins, are pegged to assets like fiat currency or gold to offer stability. The CBUAE is given the authority to designate any virtual asset as a Payment Token and impose restrictions, particularly on algorithmic stablecoins and privacy tokens unless specifically approved.
The regulations distinguish between dirham-backed and foreign currency-backed stablecoins. UAE businesses can accept Dirham Payment Tokens from CBUAE-licensed entities, while foreign stablecoins are restricted to purchasing specific virtual assets. This means payment for goods and services in foreign currency-backed stablecoins is limited. Dirham-backed stablecoins can be issued by both the CBUAE and private entities, subject to regulatory conditions.
Japan
In Japan, following the revision of its Payment Services Act, which took effect in June 2023, digital money-type stablecoins can only be issued by banks, fund transfer service providers, and trust banks. Each type of issuer is subject to specific regulations to ensure redemption and security:
Stablecoins issued by banks are treated as deposits and are protected up to 10 million JPY by deposit insurance.
Fund Transfer Service Providers that intend to issue stablecoins must secure obligations through money deposits, bank guarantees, or safe assets such as government bonds.
Trust banks are required to manage trusted assets which back their stablecoins as bank deposits, which are considered trust beneficiary rights under the Trust Business Act.
With regulatory clarity now in place, the stage is set for growth in the yen-backed stablecoin market. Ripple CEO Brad Garlinghouse recently stated that the demand for Japanese yen stablecoins is "only a matter of time." Japan’s three largest banks, Mitsubishi UFJ Bank, Sumitomo Mitsui Banking Corporation, and Mizuho Bank are reportedly developing an ecosystem for issuing stablecoins. They aim to expand their use to multi-chain and cross-chain functionalities, including NFT and security token settlements.
Singapore
In August 2023, the Monetary Authority of Singapore (MAS) introduced a regulatory framework for single-currency stablecoins (SCS) pegged to the Singapore Dollar or any G10 currency, provided they are issued in Singapore. This framework imposes several key requirements on issuers to ensure the stability and reliability of these stablecoins.
To ensure value stability, the reserve assets backing the SCS must meet stringent criteria regarding their composition, valuation, custody, and audit. This is designed to provide a high degree of assurance that the value of the stablecoins will remain stable.
Issuers are required to maintain a minimum base capital and sufficient liquid assets. This measure is intended to reduce the risk of insolvency and to facilitate an orderly wind-down of operations if necessary.
Issuers must guarantee the redemption of SCS at par value. This means that holders must be able to redeem their stablecoins at their face value within five business days of making a redemption request.
Issuers are obligated to provide comprehensive disclosures to users. These disclosures must include information about the mechanisms used to stabilize the value of the SCS, the rights of SCS holders, and the audit results of the reserve assets.
Only those stablecoin issuers who meet all the requirements set forth in the framework can apply to MAS for their stablecoins to be recognized and labeled as "MAS-regulated stablecoins." This label is intended to help users easily distinguish MAS-regulated stablecoins from other digital payment tokens, including those "stablecoins" that do not fall under MAS's regulatory framework.
Closing Thoughts
As with any rapidly evolving sector, regulatory frameworks must continuously evolve alongside technological advancements. As jurisdictions worldwide strive to balance innovation with consumer protection, it is crucial that regulatory frameworks remain adaptive and forward-thinking. Establishing robust regulations is a vital step towards creating the global frameworks that will govern future financial systems.
Clear and comprehensive regulations are essential for fostering trust and stability, while also promoting technological advancements and market growth. Continuous dialogue among regulators, industry participants, and consumers is crucial to ensure a secure, transparent, and innovative financial future. As stablecoin regulations become clearer globally, we can expect increased adoption of diverse stablecoin types, including non-USD stablecoins, which reflects a growing acceptance of digital assets across various jurisdictions and industries.
Figure 5: Clearer global stablecoin regulations could promote the growth of non-USD stablecoins, aligning their market cap ratio more closely with that of fiat currencies.
While global stablecoin regulation remains in its nascent stages, significant progress has been made in a relatively short period. Given the steady growth in usage and increasing mainstream adoption, the future for stablecoins appears promising. As the value proposition of stablecoins becomes clearer, it is essential for the crypto industry, regulators, and policymakers to work together to ensure that the emerging global financial system built on this new infrastructure supports broader financial inclusion and economic empowerment.
Disclaimer: This material is prepared by Binance Research and is not intended to be relied upon as a forecast or investment advice and is not a recommendation, offer, or solicitation to buy or sell any securities or cryptocurrencies or to adopt any investment strategy. The use of terminology and the views expressed are intended to promote understanding and the responsible development of the sector and should not be interpreted as definitive legal views or those of Binance. The opinions expressed are as of the date shown above and are the opinions of the writer; they may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Binance Research to be reliable, are not necessarily all-inclusive, and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given, and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Binance. This material may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, cryptocurrencies, or any investment strategy, nor shall any securities or cryptocurrency be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase, or sale would be unlawful under the laws of such jurisdiction. Investment involves risks. In compliance with MiCA requirements, unauthorized stablecoins are subject to certain restrictions for EEA users. For more information, please click here.
References
https://blockworks.co/news/mica-clarity-stablecoin-restrictions-revisited
https://www.finextra.com/the-long-read/974/2024-is-the-uks-landmark-year-for-stablecoin-regulation