In the ever-evolving landscape of finance and technology, digital currencies and stablecoins have emerged as prominent players, reshaping the way we transact and invest. While both fall under the umbrella of digital money, they serve distinct purposes and exhibit significant differences that are worth understanding. In this article, we'll dive deep into the distinctions between digital money and stablecoins, shedding light on their features, functions, and implications for the future of finance.
Digital Money: The Foundation
Digital money, often referred to as digital currency, is a big umbrella term encompassing all forms of currency in electronic or digital form. This category includes both traditional government-issued fiat currencies, like the US Dollar (USD) and the Euro (EUR), and cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
1. Centralized vs. Decentralized: One of the most fundamental differences between digital money and stablecoins is their centralization. Traditional fiat currencies are centralized, meaning they are issued and regulated by governments and central banks. In contrast, cryptocurrencies are decentralized, relying on blockchain technology and cryptographic principles to operate independently of any central authority.
2. Price Volatility: Digital currencies like Bitcoin are notorious for their price volatility. Their value can fluctuate dramatically over short periods, making them less suitable for everyday transactions and more attractive for speculative investment.
3. Use Cases: Digital money, particularly cryptocurrencies, is often seen as a store of value or a medium of exchange for peer-to-peer transactions. Some enthusiasts consider it a hedge against traditional financial systems and inflation.
Stablecoins: Stability in Digital Form
Stablecoins are a specific subset of digital money designed to minimize price volatility and maintain a stable value, usually pegged to a reserve asset like a fiat currency or a commodity. The primary goal of stablecoins is to combine the benefits of cryptocurrencies with the stability of traditional fiat currencies.
1. Price Stability: Stablecoins are engineered to maintain a stable value by collateralizing their supply with assets like USD, EUR, or even other cryptocurrencies. This pegging mechanism ensures that one stablecoin is roughly equivalent to one unit of the underlying asset.
2. Use Cases: Stablecoins are well-suited for a wide range of financial applications, including remittances, cross-border transactions, and as a means of preserving wealth in regions with volatile local currencies. They offer a reliable store of value while retaining the efficiency and accessibility of digital currencies.
3. Regulation: Stablecoins often operate within a more regulated framework than decentralized cryptocurrencies. Some stablecoins are subject to oversight by financial authorities, ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.
4. Examples: Prominent stablecoins include Tether (USDT), USD Coin (USDC), and DAI, each with its unique mechanism for maintaining price stability.
In summary, while both digital money and stablecoins exist in the realm of digital currencies, they serve vastly different purposes and have distinct characteristics. Digital money encompasses a broad spectrum, including both traditional fiat currencies and decentralized cryptocurrencies, with notable price volatility. Stablecoins, on the other hand, prioritize price stability through various mechanisms, making them more suitable for everyday transactions and financial applications.
As technology continues to advance, digital money and stablecoins will likely continue to shape the future of finance. Understanding the differences between these two forms of digital currency is crucial for individuals and businesses looking to navigate the evolving landscape of modern finance effectively. Whether you are seeking a hedge against inflation or a reliable means of conducting transactions, the choice between digital money and stablecoins depends on your specific financial goals and risk tolerance.
Now, let’s look at the concept of electronic money as compared to digital money.
Electronic money specifically refers to digital representations of fiat currency issued and regulated by financial institutions, while digital money is a broader term encompassing all forms of money in digital form, including both electronic money and cryptocurrencies. The key distinction lies in the regulatory framework, backing, and control associated with electronic money compared to the broader digital money ecosystem.
As ‘Directive 2009/110/EC — the business and supervision of electronic money’ implies Electronic money is the digital alternative to cash, which enables users to store funds on a device (card or phone) or through the internet and to make payment transactions. E-money institutions are organisations that have been authorised to issue electronic money.
Compliance with digital money licenses is crucial for businesses operating in the financial technology (fintech) sector. These licenses are typically required to ensure that financial services providers adhere to regulatory standards, protect consumers, and prevent illegal activities such as money laundering and fraud. The specific compliance requirements can vary significantly from one jurisdiction to another, but here are some general principles to consider:
HOW TO PREPARE TO GET AN EML?
Obtaining an Electronic Money License (e-money license) is a complex and highly regulated process that varies from country to country. The specific steps and requirements can differ significantly depending on the jurisdiction in which you intend to operate. Here's a general outline of the steps you might need to take to obtain an e-money license:
1. Research and Jurisdiction Selection: Research the regulatory environment and e-money licensing requirements in the jurisdiction where you want to operate. Understand the specific rules and regulations governing e-money services.
2. Business Plan and Model: Develop a comprehensive business plan that outlines your e-money service model, target market, revenue projections, and compliance measures. Ensure your business model aligns with the regulatory requirements of the chosen jurisdiction.
3. Corporate Structure: Establish a legal entity for your e-money business, such as a corporation or limited liability company (LLC), in accordance with local laws and regulations.
4. Capital Requirements: Determine the minimum capital requirements set by the regulatory authority in your chosen jurisdiction. The amount of the initial capital that electronic money institutions are required to maintain at the time of authorisation for a legal person applying for authorisation, is at least EUR 350k. The amount of own funds shall be equal to 2% of the average value of electronic money in circulation. Capital requirements for the provision of payment services not connected with the issue of electronic money are defined by the Central Bank and include 3 different methods of estimation, developed by the European Central Bank.
5. Compliance Framework: Develop a robust compliance framework that includes Know Your Customer (KYC) procedures, Anti-Money Laundering (AML) measures, and fraud prevention mechanisms. Ensure your framework aligns with local regulations.
6. Technology Infrastructure: Build or acquire the necessary technology infrastructure to support your e-money platform, including secure payment processing systems, data protection measures, and cybersecurity protocols.
7. Application Submission: Prepare and submit a detailed application to the regulatory authority responsible for e-money licenses in your chosen jurisdiction. Your application should include all required documentation, including your business plan, compliance procedures, and financial statements.
8. Regulatory Due Diligence: Be prepared for regulatory due diligence, which may include interviews, background checks, and investigations into your company's ownership and management.
9. Regulatory Fees and Costs: Budget for application fees, ongoing regulatory fees, and any other associated costs, such as legal and consulting fees should be ensured.
The overall costs to obtain an E-Money Institution license usually include:
Document preparation, including the creation of a business program, financial model, business plan and more than ten policies governing every aspect of the company;
Team costs in line with the requirements of your business and the regulator;
Software expenses – usually, a prepayment (done or ready to be made) or a setup fee;
Safeguarding account costs;
Costs related to opening a company, office & accounting services;
License application/authorization fee;
Certification of documents (also, it may include translated documents when the regulator requires them in the local language);
Company owner and/or team traveling costs to the country of licensing (if necessary)
Initial share capital €350,000;
Funds available to finance the company’s first years of operation €250,000-€600,000.
10. Waiting Period: Expect a waiting period during which the regulatory authority reviews your application. This period can vary in length depending on the jurisdiction and the complexity of your application.
11. Approval and Licensing: If your application is approved, you will receive an e-money license. Ensure that you fully understand the terms and conditions of the license and the ongoing compliance requirements.
12. Ongoing Compliance: Continuously monitor and adhere to all regulatory requirements, including reporting, auditing, and ongoing compliance measures. Stay updated on any changes in regulations that may impact your e-money business.
13. Launch and Operations: Once you have obtained your e-money license, you can launch your operations and begin providing e-money services to customers.
WHO WILL ISSUE AN EML?
Let’s go one step back to point out which are the regulatory authorities responsible for issuing digital money licenses in your jurisdiction.
The issuance of an Electronic Money License (e-money license) typically falls under the jurisdiction of a country's financial regulatory authority or central bank. The specific authority responsible for issuing e-money licenses can vary from one country to another. Here are a few examples from different regions:
European Union (EU):
In the European Union, e-money licenses are issued by national financial regulatory authorities in each EU member state. These national regulatory authorities ensure that e-money institutions operating within their respective countries comply with EU directives and national regulations.
In the UK, e-money licenses are issued by the Financial Conduct Authority (FCA). The FCA regulates and supervises financial services, including e-money institutions, to ensure compliance with UK financial regulations.
In the United States, e-money services may be subject to state-level regulation and licensing requirements. Different states may have varying licensing authorities, but they often include state banking departments or financial regulators.
In Singapore, e-money licenses are issued by the Monetary Authority of Singapore (MAS), which serves as the central bank and financial regulatory authority. MAS regulates e-money issuers and ensures they comply with local regulations.
In many other countries, the central bank or a dedicated financial regulatory authority is responsible for issuing e-money licenses. The specific authority and licensing requirements can vary widely depending on local regulations.
To determine which authority is responsible for issuing e-money licenses in a particular jurisdiction, you should consult the financial regulatory authority directly.
It's important to keep in mind that while there are EU directives and regulations that harmonize certain aspects of e-money regulation across member states, there can still be differences in licensing requirements and processes from one country to another. Therefore, it's advisable to work closely with legal and regulatory compliance experts who are knowledgeable about the specific requirements in the European country where you intend to obtain an e-money license. Additionally, regulations and authorities may change over time, so staying up-to-date with the latest developments is crucial. You can turn to us VR Team for more advice. Here are the authorities responsible for E-Money Licensing in some of the EU member countries:
1. Austria: Regulatory Authority: Financial Market Authority (FMA)
2. Belgium: Regulatory Authority: National Bank of Belgium (Banque Nationale de Belgique)
3. Czech Republic: Regulatory Authority: Czech National Bank (Česká národní banka)
4. Denmark: Regulatory Authority: Finanstilsynet (Danish Financial Supervisory Authority)
5. Finland: Regulatory Authority: Finanssivalvonta (Financial Supervisory Authority)
6. France: Regulatory Authority: Autorité de Contrôle Prudentiel et de Résolution (ACPR)
7. Germany: Regulatory Authority: Federal Financial Supervisory Authority (BaFin)
8. Greece: Regulatory Authority: Bank of Greece (Τράπεζα της Ελλάδος)
9. Hungary: Regulatory Authority: Hungarian National Bank (Magyar Nemzeti Bank)
10. Ireland: Regulatory Authority: Central Bank of Ireland
11. Italy: Regulatory Authority: Bank of Italy (Banca d'Italia)
12. Netherlands: Regulatory Authority: De Nederlandsche Bank (DNB)
13. Norway: Regulatory Authority: Finanstilsynet (Financial Supervisory Authority of Norway)
14. Poland: Regulatory Authority: Polish Financial Supervision Authority (Komisja Nadzoru Finansowego)
15. Portugal: Regulatory Authority: Bank of Portugal (Banco de Portugal)
16. Spain: Regulatory Authority: Bank of Spain (Banco de España)
17. Sweden: Regulatory Authority: Finansinspektionen (Financial Supervisory Authority)
18. United Kingdom: Regulatory Authority: Financial Conduct Authority (FCA)
As VR Team is a Bulgarian company, let's not forget to mention that in Bulgaria, the institution responsible for issuing EMI licenses and regulating electronic money services is the Bulgarian National Bank (BNB), which serves as the central bank of Bulgaria. The BNB is responsible for overseeing and regulating financial institutions, including electronic money institutions, to ensure they comply with Bulgarian and European Union (EU) regulations. If you are interested in obtaining an EMI license in Bulgaria, you would need to contact the Bulgarian National Bank and follow their specific application procedures and regulatory requirements. VR Team could further advise you on the specific steps for obtaining an E-Money License for Bulgaria.
Remember that compliance with digital money licenses is an ongoing process, and it requires a commitment to maintaining the highest standards of transparency, security, and regulatory adherence. Consulting with legal and regulatory experts who are well-versed in the fintech sector can be invaluable in navigating the complex landscape of compliance.
Now, let us turn our attention to stablecoin licensing.
The requirements for obtaining a license to operate a stablecoin project can vary significantly depending on the jurisdiction and the specific regulations in place. Stablecoins are a relatively new form of digital currency, and the regulatory landscape is still evolving. Here are some general considerations and requirements that a stablecoin project may need to meet in various jurisdictions:
Know Your Customer (KYC) and Anti-Money Laundering (AML) Compliance: Most jurisdictions require stablecoin issuers to implement robust KYC and AML procedures to prevent illicit activities such as money laundering and terrorist financing.
Financial Regulation: Stablecoin issuers need to comply with financial regulations that apply to payment service providers, money transmitters, or electronic money institutions, depending on the specific nature of the stablecoin and its use cases. The current regulatory landscape for stablecoins is marked with uncertainty, particularly at the U.S. federal level. The lack of a comprehensive, national legal framework for stablecoins, coupled with the rapid growth of the space, has prompted lawmakers and regulators to step in to fill the gap. Over the past two years, various regulatory bodies have taken a number of steps to offer guidance related to the issuance and use of stablecoins. While the guidance generally supported the idea that stablecoin activities should be regulated on a comprehensive basis, whether within the current financial system or without, we will need to wait for future movement from lawmakers and regulators to better understand how stablecoins will fit into existing laws.
Licensing: In some jurisdictions, stablecoin issuers may be required to obtain specific licenses or registrations to operate legally. These licenses may vary from e-money licenses to payment institution licenses, depending on local regulations. As of 2023, in USA in the absence of an explicit overarching regulatory framework, various federal and state regulatory agencies have improvised a de facto framework comprising guidance and enforcement actions, applying existing banking and capital market regulations to stablecoins where applicable. Today, stablecoin issuance remains the domain of state-licensed nonbank entities (e.g., money services businesses), which face limited federal oversight outside of registration requirements for anti-money laundering purposes.
Reserve Requirements: Many regulators require stablecoin issuers to maintain adequate reserves to back the value of the stablecoin tokens in circulation. The reserve requirements may include holding an equivalent amount of fiat currency or other liquid assets.
Legal Entity Formation: The stablecoin project needs to establish a legal entity in the jurisdiction where it intends to operate, and this entity should be compliant with local corporate and financial laws.
Consumer Protection: Regulations often include provisions for consumer protection, which may include disclosure of risks associated with stablecoins and dispute resolution mechanisms. Relatedly, stablecoin issuers and the firms that trade stablecoins present customer and investor protection considerations. For example, an issuer is not currently required to disclose information about a stablecoin’s underlying technology or its reserves, which may create operational risks and information asymmetry. Also, unlike traditional brokers, which must segregate customer funds, stablecoin issuers and cryptocurrency platforms may be comingling user funds with platforms funds. This could make it difficult for holders to retrieve funds if the exchange were hacked or went bankrupt, putting users in the disadvantageous position of being “unsecured creditors.”
Data Protection and Privacy: Compliance with data protection and privacy laws, such as GDPR in the European Union, are necessary, especially if the stablecoin issuer collects and processes user data.
Securities Regulations: Depending on the design and issuance of the stablecoin, it may be subject to securities regulations. Some stablecoins may be considered securities if they involve investment contracts or the expectation of profits.
Cross-Border Considerations: If the stablecoin project plans to operate internationally, it should be aware of and comply with regulations in multiple jurisdictions, which can be complex and may require legal counsel.
It's important to note that regulatory requirements for stablecoins can change over time, and new guidelines may be introduced. Therefore, it's essential to consult with legal experts who specialize in cryptocurrency and financial regulation to navigate the specific requirements in your jurisdiction and ensure compliance with all applicable laws and regulations. Additionally, engaging with regulators and seeking their guidance can be a proactive step for stablecoin projects to stay compliant.
INSTITUTIONS RESPONSIBLE FOR STABLECOIN LICENSING
In European countries, the issuance of licenses for stablecoin projects typically falls under the scope of national regulatory authorities, as well as European Union (EU)-level institutions in some cases. The specific authority responsible for issuing licenses can vary from one country to another within the EU. Here's a general overview:
1. European Central Bank (ECB): The ECB, as the central bank of the Eurozone, plays a significant role in the oversight of financial institutions and payment systems. If a stablecoin project aims to operate within the Eurozone or has a significant impact on the euro currency, it may need to engage with the ECB and comply with their regulations.
2. National Competent Authorities: Each EU member state typically has its own national regulatory authority responsible for financial services and payment systems. These authorities may issue licenses and oversee stablecoin projects operating within their respective countries. Examples include the Financial Conduct Authority (FCA) in the UK, BaFin in Germany, and ACPR in France.
3. European Securities and Markets Authority (ESMA): ESMA is an EU-level authority responsible for securities and financial markets regulation. If a stablecoin is considered a security or investment product, ESMA may provide guidance and oversight.
4. European Banking Authority (EBA): EBA focuses on the regulation and supervision of the banking sector within the EU. If a stablecoin project involves banking activities, such as accepting deposits, EBA regulations may apply.
5. Anti-Money Laundering (AML) Authorities: Compliance with AML regulations is crucial for stablecoin projects. National AML authorities in European countries enforce AML regulations, and stablecoin issuers must adhere to these requirements.
6. Payment Service Authorities: In the EU, the Payment Services Directive (PSD) regulates payment services. National payment service authorities oversee payment service providers and electronic money institutions, which may encompass certain stablecoin activities.
It's important to note that the regulatory landscape for cryptocurrencies and stablecoins in Europe is complex and subject to ongoing developments. Additionally, regulations may vary from one country to another within the EU. Stablecoin projects operating in Europe should consult with legal experts who specialize in financial regulation and engage with the relevant national and EU-level authorities to ensure compliance with applicable laws and obtain any necessary licenses or approvals.
Useful sources of information
1. Deloitte. - Licensing and Supervision of Electronic Money Institutions –
2. Global Legal Insights – Blockchain & Cryptocurrency regulation
3. Advapay.eu - Payment & E-Money Institution License Costs: What to Know