How Regulators are Classifying Digital Currency & Separating Securities from Utility Tokens!

Read Time:5 Min, 24 Sec

The regulatory classification of stablecoins can vary depending on jurisdiction and the specific characteristics of the stablecoin. It’s always good to check with local regulations and guidelines before investing in any stablecoin. Understanding stablecoin regulations can help you make more informed decisions, protect your investments, comply with the law and gain access to markets, and stay informed about future developments in the stablecoin market.

Stablecoin regulations often require the companies behind them to disclose information about their operations, reserves, and financials to ensure that they have the ability to maintain the stability of the value of their coin. By understanding regulations you can have more confidence and trust in the stablecoin you invest in.


What types of stablecoins are considered as a security or derivatives?

Stablecoins that are considered securities or derivatives are those that are backed by assets such as commodities, traditional fiat currencies, or other cryptocurrencies, and are typically subject to regulation by financial authorities. Examples of stablecoins that may be considered securities include those that are backed by precious metals or other commodities, and those that are issued as part of a funding round or initial coin offering (ICO) and traded on a secondary market.

Additionally, Derivative Stablecoins are a new class of stablecoins that are backed by a range of underlying assets. These assets can be anything from other cryptocurrencies to traditional assets such as stocks, bonds, commodities, or real estate. These stablecoins often track the value of an underlying asset, and can be bought or sold on cryptocurrency exchanges just like other stablecoins, but unlike other stablecoins these are considered as Security by regulators.


Examples of stablecoins that may be considered securities or derivatives include:

Tether (USDT): Tether is a stablecoin that is pegged to the value of the US dollar, and is backed by reserves of US dollars held by the Tether Limited company. Tether is considered a security in some jurisdictions due to its association with other cryptocurrencies and its trading on secondary markets.

TrueUSD (TUSD): A stablecoin that is pegged to the US dollar and is backed by US dollar reserves held by trust company. It operates as a ERC-20 token on Ethereum blockchain. It’s considered as security by some regulatory authorities.

Digix Gold Token (DGX): is a stablecoin that is backed by gold, and is intended to be used as a means of purchasing and trading gold on the Ethereum blockchain. The value of DGX is tied to the price of gold and it’s considered as security in some jurisdictions.

MakerDAO (DAI): A decentralized stablecoin that is pegged to the value of the US dollar. DAI is backed by a collateralized debt position (CDP) in the form of Ether, which is held as collateral by users who generate DAI. MakerDAO may be considered a security or a derivative in some jurisdictions because of its relationship to other cryptocurrencies.

It’s important to note that these are examples, and that classification of stablecoins as securities or derivatives may vary depending on jurisdiction and the specific characteristics of the stablecoin. The classification of a specific coin may change over time due to regulatory changes or other factors, and it’s important to be aware of any changes in classification or guidance from regulators.

What are utility tokens?

Utility tokens are a type of cryptocurrency that can be used to access a specific product or service, or to participate in a specific network or ecosystem. They are often used to incentivize early adopters of a product or service, and can be exchanged for goods or services within the network or ecosystem in which they are used.

Utility tokens differ from security tokens in that they do not confer ownership rights or the expectation of profit in a company, they provide access to a certain service or product or act as an internal currency to reward participant in the ecosystem, also in some cases, they may also give voting rights.

Examples of utility tokens include tokens used to access a decentralized application (dApp), tokens used to pay for services on a blockchain platform, and tokens used to incentivize users of a decentralized network.

It’s important to keep in mind that, the classification of a token as a utility token or security token is not always clear cut and may depend on the specific characteristics of the token and the regulatory environment of the jurisdiction. It’s always good to check with local regulations and guidelines before investing in any token.

Regulations can have both positive and negative effects on the stablecoin market.

Positive effects of regulations include:

Investment protection: Regulations are put in place to protect investors from fraud, deception, and other risks associated with investing in digital assets. By providing oversight and requiring transparency from stablecoin issuers, regulations can help to ensure that stablecoins are issued and traded in a fair and honest manner.

Legal compliance: Regulations help to ensure that stablecoins are issued and traded in compliance with laws and regulations in the jurisdictions in which they operate, which can provide a level of legal certainty for stablecoin issuers and traders.

Consumer protection: Regulations can help to ensure that stablecoins are not used for illegal activities, and that consumers are protected from fraud and deceptive business practices.

Foster innovation: regulations can provide the right balance of oversight to foster innovation in the stablecoin and cryptocurrency market, that way, new companies, startups and projects can emerge safely, providing new options for the users and investors.

However, regulations can also have negative effects, such as:

Restricting access: Regulations can make it more difficult or expensive for stablecoin issuers to comply with the rules, which can discourage innovation and make it harder for new stablecoins to enter the market.

Stifle innovation: Regulations that are overly restrictive or difficult to comply with can limit innovation in the stablecoin market and make it harder for new and emerging technologies to gain traction.

Restrict trading: In some cases, regulations may limit or restrict trading of certain stablecoins in certain jurisdictions which can lead to less liquidity and lower trading volumes.

Higher costs: regulations can increase the costs of operating in the stablecoin market, which can be passed on to the users and investors through higher fees.

It’s important to keep in mind that the optimal regulation of stablecoins is a complex subject and that different jurisdictions will have different needs and priorities. The effects of regulations will depend on the specifics of the regulations and how they are implemented.

Last Updated on 05/13/2023 by Emmanuel Motelin

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