Legal issues with stablecoins

20 August 2025

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 This approach avoids trying to fit stablecoins into outdated categories like securities or commodities and instead regulates them on their own terms.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