With many different sectors moving towards digitalisation, the finance industry is working together with the crypto industry to merge and create new financial products for consumption. As part of the financial industry’s move towards digitalisation, stablecoins have been created, and efforts are being made for these new products to be appropriately regulated. As shall be seen in the following paragraphs, several regulators are opting to regulate stablecoins in the same manner they regulate existing financial instruments.
E-money versus Stablecoins – one and the same thing?
Crypto-assets are generally divided into three categories, namely:
A number of regulatory authorities around the world, such as the European Supervisory Authorities (the “ESAs”), the UK Financial Conduct Authority (the “FCA”), the US Securities and Exchange Commission (the “SEC”) and the Malta Financial Services Authority (the “MFSA”) have, in the past months, published guidance and advice intended to provide clarity to market players transacting in crypto-asset, while others chose to enact legislation to regulate such crypto-assets or crypto-assets related activities. Apart from providing adequate protection to those transacting in crypto-assets, such measures were also intended to ensure that firms whose business activities revolve around crypto-assets are able to determine whether such crypto-assets fall within the scope of domestic or supranational financial and securities laws – which would therefore require such firms to conduct themselves in accordance with the relevant regulations.
A particular type of crypto-asset can be used to facilitate the buying and selling of goods and services and other payment services. These crypto-assets are generally termed as “Payment Tokens”. Payment Tokens are not issued or backed by any central authority; however, they are generally accepted to constitute a means of payment by the general public. This said, many jurisdictions do not consider them as legal tender and as a result, are not considered to constitute ‘money’.
What is electronic money?
The EMD2 defines Electronic Money as something of monetary value which is electronically stored, and is represented by a claim on the issuer for the purposes of payment transactions between the issuer and an accepting party. The transaction shall then be recorded on a receipt. It is very important to note that the monetary value of Electronic Money does not represent any tangible asset, but rather represents the fiat currency equivalent of that monetary value. Electronic money, unlike stablecoins, is not linked to any particular account.
The definition of Electronic Money therefore has the following elements:
- Electronically, including magnetically, stored monetary value
- Represented by a claim on the issuer
- Issued on a receipt of funds
- For the purpose of making payment transactions
- Accepted by a natural or legal person other than the electronic money issuer
Electronic Money must be electronically stored. The interpretation of “electronically stored” is very wide, so as to include both the Electronic Money products presently available, as well as the products which may develop in the future. Thus, the EMD2 has adopted a very technologically neutral approach. As mentioned above, the term “monetary value” is interpreted to mean the representation of its fiat currency equivalent, and not any other tangible asset.
The element of “a claim on the issuer” can also interpreted two-fold as follows:
- A claim for redemption; and
- A claim for conversion.
These claims are available to the holder of the Electronic Money, meaning the person to whom the Electronic Money is issued. Electronic money can also only be issued once the payment has been received by the issuer. The term ”funds” is also interpreted in the same manner as in the PSD2, meaning to include “banknotes and coins, scriptural money or Electronic Money”.
The purpose of electronic money is exclusively for making payment transactions. Thus, for stablecoins to be considered as electronic money, they need to be issued exclusively for payment transactions. Any additional rights contained within the stablecoin fall outside the parameters of the EMD2.
What are Stablecoins?
Stablecoins are a type of payment token backed by real assets or by fiat currency. Stablecoins have gained significant popularity amongst individuals, investors and authorities alike since they seem to provide the benefits of traceability and transparency when carrying out payments on a blockchain, whilst providing the stable valuations of fiat currencies. Many central banks of different states have created their own stablecoins which are backed one-is-to-one (1:1) by the fiat currency of each central bank. The main question with regards to stablecoins is if they can qualify as Electronic Money under the Electronic Money Directive (Directive 2009/110/EC) (“EMD2”).
Stablecoins were at the heart of a number of publications issued by the ESAs, the European Central Bank (the “ECB”) and other European regulatory authorities. The prevailing concerns surrounding Stablecoins is their proximity to Electronic Money – a payment instrument which is regulated under the Electronic Money Directive (Directive 2009/110/EC) (“EMD2”).
Can Stablecoins be classified as Electronic Money?
In the ECB’s ECB Occasional Paper Series Number 230, it is stated that stablecoins which are issued as tokenised coins can sometimes be categorised as electronic money under the EMD2. The EBA has also supported this statement by saying that certain stablecoins initiatives do satisfy the definition of “electronic money”, even in the opinion of national competent authorities. With that being said, the Occasional Paper does not classify stablecoins as crypto-assets generally-speaking, but can be considered as electronic money in certain structures. Naturally, this is just a generic approach and each stablecoin needs to be evaluated in its own separate merits.
Likewise, the UK’s financial regulator, the Financial Conduct Authority (“the FCA”) has come to the conclusion that stablecoins and fiat-backed coins can in fact qualify as Electronic Money, and shall then fall under the FCA’s remit. This was realised after a comprehensive overview of the crypto-market. That being said, stablecoins and other fiat-backed coins can only be categorised as electronic money if their structure allows them to do so. Thus, such a classification is dependent on a case-by-case analysis.
The approach of the regulators seems to be that stablecoins can classify as Electronic Money, both at EU-level and at a local level, if the structure of the stablecoin allows it to be classified as such. Thus, the Regulators cannot classify all stablecoins as Electronic Money, and one needs to adopt a case-by-case basis for this classification. This classification shall ultimately depend on the elements of the stablecoin, and how these elements will fit under the current Electronic Money laws and regulations.
Conclusion: E-money versus Stablecoins
In order for stablecoins to be classified and regulated as Electronic Money, all the elements pertaining to Electronic under the ERD2 need to be satisfied. The Regulators’ approach is that stablecoins which exhibit clear similarities to Electronic Money need to be classified as such. The Regulators need to adopt a system where one analyses the structure of the stablecoin using determinate criteria, and then classify such coins on a case-by-case basis. If the stablecoin does not fall under the scope of the ERD2, it would likely generally remain unregulated, unless it is catered for separately under local legislation as is the case under Maltese law, where such coins would then be regulated as virtual financial asset.
One ought to appreciate that there are no clear guidelines as to how or whether certain types of crypto-assets, specifically stable coins, classify as Electronic Money, and therefore – irrespective of any test – it ultimately depends on the elements constituting those particular crypto-assets, the interpretation of the EMD2, jurisprudence and the arguments presented for and against such classification.
Written by Jonathan Galea & Patrick Gatt