The growing popularity of stablecoins is making their legal classification increasingly important. A key issue is determining whether a token offered as a “means of payment in Web3” should in fact be classified as electronic money within the meaning of the EMD2 Directive.
Why does this matter? As emphasised by Wojciech Ługowski, attorney-at-law and managing partner at Lawarton,- if a token meets the definition of electronic money, its issuance and distribution are subject to a specific and stringent regulatory regime.
What Is Electronic Money Under EMD2?
Directive 2009/110/EC (EMD2) defines electronic money as electronically stored monetary value representing a claim on the issuer, which is issued on receipt of funds for the purpose of making payment transactions and accepted by natural or legal persons other than the electronic money issuer.
Whether a token qualifies as electronic money depends on the cumulative fulfilment of specific conditions, in particular: issuance in exchange for funds, the existence of a claim against the issuer, and the use of the token for payment purposes in transactions with third parties.
What determines the legal classification is not the name or how it is marketed, but its actual function. The mere use of blockchain technology does not exclude the application of regulations relevant to payment services and electronic money.
Stablecoins and E-Money: Where Does the Boundary Lie?
Fiat-backed stablecoins may, in practice, perform a function similar to that of electronic money. In particular, where a token is fully backed by a bank deposit, redeemable for fiat currency, and used as a means of payment accepted by third parties, the risk of its classification as e-money increases significantly.
The legal qualification of a token is determined not by its name, but by the manner in which it operates in the market. A token used like money may be regarded under MiCA as an e-money token (EMT) if it aims to maintain a stable value relative to a single official currency, or as an asset-referenced token (ART) if it references a basket of assets. In the case of an EMT, MiCA treats the token as electronic money, triggering regulatory consequences under both MiCA and EMD2.
What Features of a Token May Indicate Its Classification as Electronic Money?
- the ability to redeem the token in exchange for fiat currency at par value,
- linking the value of the token to a single official currency (e.g. the euro or the US dollar), in particular under a 1:1 model,
- the existence of an issuer against whom the token holder has a claim (including responsibility for issuance and redemption),
- acceptance of the token by third parties as a means of payment,
- maintaining financial reserves to cover the value of the tokens in circulation.
Obligations of an Electronic Money Institution
The recognition of a token as electronic money is not merely a formal classification, but entails the imposition of specific regulatory obligations on the issuer. As a rule, this means the need to hold a licence as an electronic money institution (EMI) or to cooperate with an entity that holds such authorisation.
In particular, the issuer is required to ensure the safeguarding of users’ funds and adequate backing of the issued tokens with safe and liquid assets, to implement AML/KYC procedures, to guarantee the right to redeem tokens at par value, and to comply with ongoing reporting and supervisory obligations.
In practice, this entails the need to adapt the organisational structure, ensure an adequate level of capital, and maintain continuous regulatory compliance. At the same time, it opens the door to full-fledged cooperation with banks, fintechs, and other regulated institutions.
What Do AMLR and MiCA Change?
The new European regulatory package,especially the MiCA Regulation and the forthcoming AMLR Regulation,significantly streamlines the rules governing projects that use stablecoins and tokens performing functions similar to money.
MiCA introduces detailed rules for fiat-referenced tokens (EMTs), which, as a rule, may be issued only by credit institutions or electronic money institutions. The issuance of such tokens entails, in particular, an obligation to ensure redemption at par value, to safeguard users’ funds, and to prepare and notify the issuance documentation (a whitepaper) to the competent supervisory authority.
AMLR, which will apply from 2027, strengthens requirements relating to user identification, transaction monitoring and reporting, and the prevention of abuse in the crypto-assets sector. Failure to comply with these obligations may result in severe administrative sanctions.
In practice, this means that within the European Union a “fully fledged” stablecoin now operates under a regime similar to the traditional financial sector – except that it is based on blockchain technology.
The Most Common Mistakes in Token Design
In practice, one of the most common mistakes is the assumption that the use of blockchain technology, smart contracts, and the preparation of a whitepaper automatically places a project outside the regulatory regime. In reality, the absence of the required licence or a regulated partner, treating token redemption as an optional feature, ignoring the linkage between the token’s value and a fiat currency, or misclassifying the token from a legal perspective can all give rise to significant regulatory risks.
From the perspective of supervisory authorities, the decisive factor is the function of the token and its actual use in the market. If a token in practice performs a role similar to that of money, it may fall within the regulatory framework applicable to electronic money – regardless of the marketing narrative adopted or the technology used.
How to Assess Your Project?
As emphasised by attorney-at-law Wojciech Ługowski – it is worth conducting a basic assessment of the project model before launching a token issuance, in particular by considering the following:
- does the business model assume exchanging fiat currency for the token or vice versa?
- can users use the token to make payments?
- who controls token issuance and manages its backing or stability?
- does the user relationship have features of a financial service, including the creation of a claim against the issuer?
- has the project been consulted with a lawyer specialising in financial regulation?
If the answer to most of the above questions is “yes”, there is a high likelihood that the project will require a regulatory licence or cooperation with an entity holding the relevant authorisations.
Summary
The boundary between stablecoins and electronic money under EU law is today significantly clearer than it was just a few years ago. EU regulations are based on a functional approach: if a token is issued in exchange for funds, grants the holder a claim against the issuer, is redeemable at par value, and is used to make payments in transactions with third parties, it may be classified as electronic money within the meaning of EMD2.
In practice, this means that designing payment tokens requires a conscious regulatory approach already at the concept stage. When planning a token issuance, it is particularly advisable to:
- start with a thorough functional analysis of the token,
- plan compliance with the MiCA and EMD2 regimes,
- consider obtaining an electronic money institution licence or cooperating with a regulated entity,
- take into account AML/CFT obligations, including the forthcoming requirements under AMLR.
Tokenisation of value may become a significant element of the future financial market, but only where it is based on a proper understanding of the concept of “digital money” and the regulatory consequences arising under European Union law.