Legal Perspective: The Past and Present of Stablecoins and the Compliance Path for Traditional Payment Institutions to Transform Web3

Authors of this article: Shao Jiaio and Zheng Hongde

On April 25, Mankun Law Firm, in conjunction with Techub News, Mobile Payment Network, Web3Hub, and BlockbeatHK, successfully held the theme salon of "How Traditional Payment Transforms Web3.0: Innovation Path and Compliance Practice" in Qianhai, Shenzhen. The activity focuses on PayFi's potential as a connection hub between Web2 and Web3, and deeply explores innovative paths and compliance practices in the context of global financial technology reconstruction and on-chain payment maturity. How to "open" payment? How do global regulatory trends evolve? How to truly implement PayFi? These issues became the focus of hot discussion among the guests.

Jayden Shao, equity partner of Mankun Law Firm, published a sharing titled "From the Stable Coins - Looking at the Compliance Path for Traditional Payment Institutions to Transform Web3" at the event.

This article is compiled from the speech content of Lawyer Shao. Combined with Mankun’s practical experience in the field of Web3, it systematically analyzes the past and present of stablecoins, global regulatory trends, and the compliance points of the crypto payment track, providing reference for traditional payment institutions to transform into Web3. The following is the speech content.

Lawyer Shao Jiayi: Hello everyone, I am very honored to discuss with you a very important topic here today - stablecoins and how traditional payment institutions can transform into Web3. When talking about crypto payment, stablecoins are a topic that cannot be avoided; before talking about crypto payment, we should first talk about compliance, which is the reason why compliance comes first. I will develop from three aspects: the past and present of stablecoins, global regulatory trends, and compliance points of crypto payment tracks. Next, let’s start my sharing today.

Part1: The past and present life of stablecoins

Stablecoin 1.0: Centralization and Controversy - Taking USDT as an

Example

Today, from the perspective of compliance, I divide it into four versions of the past and present of stablecoins. The first is the stablecoin 1.0 era, typical of which is USDT. Everyone is familiar with it. When it comes to "U" usually refers to USDT. USDT was unveiled in 2014, characterized by centralized issuance, fiat currency anchoring, and controversy over opaque reserves.

USDT has a bumpy future, with two typical events. In 2017, USDT was exposed to share a bank account with its affiliate Bitfinex. In order to fill the $850 million deficit, Bitfinex seconded funds from Tether's reserves, but the users were completely unaware of it. The matter was investigated by the New York Attorney General, forcing Tether to settle judicially and fined $18.5 million.

Under pressure, Tether made its first public reserves and found that only 3% was cash and more than 60% were high-volatility assets such as commercial paper, which caused an uproar in the market. Market panic led to a wave of redemption in the secondary market, with USDT decoupling to $0.96. Historically, USDT has experienced many waves of decoupling and redemption, but the situation has gradually improved in recent years. From the large decoupling rate in 2015 to the six decoupling peaks in 2019, it has gradually become stable in recent years.

In a word, USDT: grab the market first, then supplement compliance. At present, USDT is still the big brother in the stablecoin industry, accounting for 70% of the market share.

Stablecoin 2.0: Compliance-based—taking USDC as an example

The representative of stablecoin 2.0 is USDC, which began issuance in 2018, and is characterized by compliant registration, 100% cash or Treasury reserves, and continuous audits. Unlike Tether's barbaric style of playing, USDC issuer Circle takes the "righteous gentleman" route.

Circle has obtained MTL licenses in more than 40 states in the United States and has honestly applied for one state by one. It is the most licensed stablecoin issuer in the United States. Based on this compliance practice, Circle has cooperated smoothly with payment institutions and gained trust, such as in-depth cooperation with Visa. Circle is also the first stablecoin issuer to fully comply with EU MiCA regulations. Last year, USDT was removed from the EU, and Circle became the first compliant stablecoin recognized by the EU.

Summary Circle: There is no coolest algorithm, but it has the most solid trust, the strictest license and the hardest partner. Circle sets the benchmark for other stablecoins and is the first stablecoin to obtain MiCA compliance.

Stablecoin 3.0: Algorithm Failure—Terra USD as an Example

Stablecoin 3.0 is the era of algorithmic stablecoins, typical representative is TerraUSD (UST). But this version seems to be the wrong technology tree, which is characterized by unsecured or partially collateralized, and uses algorithms to adjust the currency price and keep it pegged to the US dollar or other currencies.

However, the TerraUSD crash in 2022 exposed the systemic risks of algorithmic stablecoins. Terra and its sister Luna entered a death spiral due to huge market fluctuations, and the price of the coin fell from US$1 to US$0.1, and investors lost US$45 billion. Project founder Do Kwon was extradited to the United States in March 2023 and faces a number of charges such as securities fraud, commodity fraud, and telecommunications fraud.

This tells us that algorithmic stablecoins fail under regulatory gaps due to no redemption, no compliance, and no responsible subject. The lesson of TerraUSD is: Without reserves, there is no trust, and without laws, there is no anchor. Stablecoins require top-down supervision to bring trust to users.

Stablecoin 4.0: Payment giants enter the market—taking PYUSD as an

example

Next is the stablecoin 4.0 era, starting from 2023, the most typical one is PYUSD. Its characteristics are that traditional payment giants have begun to make stablecoins, embed payment scenarios, and strengthen regulatory structures.

Let me give you the example of PayPal, which is a stablecoin launched by PayPal and Paxos Trust. Everyone knows that PayPal is an old payment institution and Paxos is a trust institution. They use the front store and back factory model to cooperate in issuance. PYUSD has also become the first dollar stablecoin to be fully regulated by the US Securities and Exchange Commission, the Office of the Regulatory Commission and the New York Department of Financial Services, creating a comprehensive scale of trust structure and multiple departments.

PYUSD also has another feature, which embeds compliance laws and regulations into smart contracts, reserves compliance control interfaces, such as freezing address, recall, asset whitelist filtering and other functions, embeds regulatory technology ideas into code, and can actively cooperate with compliance, such as freezing money laundering addresses, and cooperates with sanctions and compliance as needed.

Summary PYUSD: The first stablecoin issued by a trustee, embedded payment scenarios, and written code in compliance.

Part2: Global Stablecoin Regulation Trends

Next, I would like to share with you what is your current attitude towards stablecoins around the world? Is it compliant or non-compliant? What kind of institutions can issue stablecoins? What are some requirements? I made a table and basically summarized the stable currency policies of major global laws.

There are five major legal jurisdictions in the world that have clear legislation on stablecoins. The EU, Singapore and Japan are ahead of the list. They have implemented stablecoin-related regulations in 2023 and 2024. Other legal policies are more advanced in implementing the United States and Hong Kong. The United States is expected to issue a stablecoin bill this year. It is currently under review by the Senate and House of Representatives, and Hong Kong is also expected to issue a stablecoin bill this year.

What are the similarities and differences about the stablecoin bills in these five typical judicial regions? I made a comparison, mainly from who can issue coins, capital requirements, anchorable currency, reserve custody, audit frequency, and redemption requirements.

Let’s first look at who can issue coins. Japan is more strict, and only restricts the issuance of coins by financial institutions such as banks or trust companies. Other areas are wider. In addition to typical financial institutions such as banks, other company-type technology companies can issue coins if they apply for corresponding licenses.

In terms of capital requirements, the EU currently does not have a unified registered capital requirement, and each member state can formulate appropriate capital requirements on its own. If a non-bank institution issues coins in Singapore, it will require a capital requirement of at least S$1 million, or 50% of the annual operating expenses. In Japan, because it is a financial institution that issues coins, it is enough to meet the original capital threshold. The United States has not yet been unified. According to the current draft, Hong Kong is HK$25 million or 1% of the face value of the circulating stablecoin, whichever is higher.

In terms of currencies that can be anchored, the United States is relatively strict, and only allows anchoring the US dollar, which shows that the United States wants to continue to promote the hegemony of the US dollar on the chain. Other regions are relatively loose, and the EU, Singapore, and Japan can issue situations where the country's fiat currencies, G10 single currency or other fiat currencies are anchored. Hong Kong is actually relatively strict, mainly based on the Hong Kong dollar, and anchoring other foreign currencies requires discussion at each issue.

Everyone is similar in terms of reserve custody requirements . The basic requirement is 1:1 full reserve, and it is a high liquidity and stable asset. In terms of custody, independent custody is required.

In terms of audit frequency requirements, the judicial regions are different. Hong Kong is relatively relaxed. Its draft requires annual audits, but the current sandbox testing requires a monthly compliance progress report. Whether there will be changes in the future remains to be announced.

The redemption requirements are relatively strict, and basically redeeming them at any time, or in the case of T+5 or T+1.

Common points and differences in regulation

Judging from the above review, the stablecoin regulatory ideas in these major judicial regions around the world have four common points:

1. Full reserve and independent custody are the most basic requirements;

2. The requirements for immediate redemption, even if the various jurisdictions are different, basically no more than 5 working days;

3. Directly or indirectly prohibit algorithmic stablecoins. Major regulatory agencies have seen that algorithmic stablecoins are not feasible, failed precedents, and cannot meet full reserve requirements;

4. Interest-generating stablecoins are prohibited. The United States clearly prohibits them. Other regional bills pass other requirements and cannot issue interest-generating stablecoins, because they are essentially profitable securities products and may be classified as securities or financial products.

I have also summarized the differences between various jurisdictions:

• EU: The most systematic regulation is the most convenient to transnationally. As long as you obtain a license from the 27 EU countries, basically the entire EU 27 countries can use it;

• Singapore: The bill was issued earlier, with many rules but flexible, suitable for pilot projects, detailed supervision, clear processes, and the subject of issuing coins does not have to be a bank, but technology companies can do it;

• Japan: Banks control the market, only financial institutions can issue stablecoins, so there is relatively little room for innovation;

• United States: The policy is relatively complex, with two dual-track regulatory mechanisms that are parallel to federal and state supervision. But the United States is currently the most active market for crypto funds and has huge potential;

• Hong Kong: The system is on the way, and it can basically be introduced in 2025, and the policies are relatively friendly. At this stage, you can run while picking up cards, such as Yuancoin and JD Stablecoin testing local scenes in the sandbox. After the subsequent bill is issued, it can expand to Southeast Asia.

Part3: Key points of crypto payment track and compliance

Crypto payment segment

After talking about stablecoins, all the payment institutions present were paid, and they may be more interested in transforming into crypto payments. Maybe not everyone wants to issue stablecoins, but wants to try other areas of the payment track. Next, let’s talk about the playable scenes in the payment track.

I took a look at the sub-track of crypto payments, because crypto payments are based on stablecoins, DeFi, and programmable technology, and can be made in many products, which can be divided into six major modules:

1. Merchant payment access and settlement;

2. The underlying payment network and clearing infrastructure;

3. Hosting or account services;

4. Payment solutions for vertical scenes can be made into small and beautiful tracks;

5. Compliance and data support, such as Beosin, who came today, focuses on KYT's compliance system;

6. Value-added services of the payment ecosystem.

These six modules include many sub-sectors. It can be seen that crypto payments are playable. Compared with traditional payments, there are many more tracks that can be deeply cultivated, tried or created by themselves.

License issues

The first compliance issue that everyone is concerned about when entering crypto payment is license, I believe this is the first question that all institutions will think of. I took a look at the current global panoramic situation of licenses related to crypto payments and made into a table, including payment licenses such as crypto custody, payment exchange, stablecoin issuance, cross-border remittance, etc.

Currently, the licenses that apply for more frequently in practice include: the EU's CASP or EMI license; the UK's payment license; the Singapore license, especially the payment institutions in Asia, which will apply; the Hong Kong MSO license, strictly speaking, is a traditional currency exchange license, not a crypto payment license; the US MSB and MTL license. Because crypto payments are globalized, you may also have questions: Can you serve global users by obtaining a judicial region license?

No. In fact, except for the EU's MiCA passport mechanism, a virtual asset service provider license obtained by the EU under the MiCA Act can be opened for use in 27 other countries. All other compliance licenses are only valid locally and do not automatically give the right to conduct business with users in other legal regions. If you get a license, you will only be guaranteed to be local. If you do business in other places, you will not be allowed to do so.

Another question: Have you obtained a compliance license and started crypto payment business without worries?

Actually, not. A license is just the starting point of compliance. Only by obtaining a license can you start a business, but there are still many points that need to be paid attention to in the business process. If no attention is paid or relevant compliance requirements are established, criminal risks may be involved; if there is but not done well, it may be just an administrative penalty. Let me give you a few examples:

1. Coinbase's British subsidiary, for failing to solve the problem of financial crime control, provided electronic currency services to more than 10,000 high-risk customers, involving US$249 million in transactions and was fined 3.5 million pounds. Although there is a license, anti-money laundering is not done well.

2. Payeer was fined 9.3 million euros by Lithuania for violating anti-sanctions and anti-money laundering regulations, the highest fine record in Lithuanian history. It allows Russian customers to trade in rubles through sanctioned Russian banks, providing crypto wallets, account management and storage services to Russian individuals and legal persons, violating international sanctions and anti-money laundering regulations.

3. Block Inc was fined $40 million in April 2025 for lack of anti-money laundering compliance. It failed to effectively enforce the U.S. Bank Secrecy Act and Anti-Money Laundering regulations, with significant flaws in KYC procedures and transaction monitoring.

4. CryptoPay's card service provider UAB Payrnet has been revoked, and the specific details of the violation have not been disclosed. This shows that in the payment field, compliance requirements are not made well. In addition to fines, the license may even be revoked. You may not be able to apply for a license in the future and may say goodbye to this industry.

Eight major compliance points

In addition to these cases, there are eight compliance points that need to be paid attention to in the crypto payment track:

1. Anti-money laundering and compliance rules, mentioned many times in the previous cases;

2. Sanctions are compliant. As we all know, whether it is the United Nations, the United States, the European Union, the United Kingdom or other international organizations, there are many regional or personal sanctions requirements that need to be implemented;

3. Tax and accounting compliance. There are regulatory differences in whether to tax crypto assets and how to collect them in various parts of the world, and they need to be adapted to local conditions;

4. Data privacy and protection, especially for countries such as the EU that have formulated personal information protection laws, as it involves KYC and cross-border data circulation, it is necessary to pay special attention;

5. Cybersecurity and business resilience, which are technical compliance requirements;

6. Consumer protection;

7. Third-party and outsourcing risk management, mentioned earlier that cooperation with other institutions may result in business impact, shutdown or switching suppliers due to problems with other institutions or revocation of licenses;

8. Continuous regulatory reporting and audit requirements.

The above are the compliance priorities we have summarized that the crypto payment track needs to pay attention to. From license application to subsequent compliance, it is also a key area for Mankun to serve.

Conclusion: Compliance builds the cornerstone of trust

To sum up, in the Web3 payment track, it is not a game between code and law, but a cornerstone of trust that is built with compliance. We see more and more payment institutions, after obtaining a license from a country or region, or after raising funds in the future, the first thing they want to do is to expand the license and apply for more licenses in the jurisdiction. Compliance is often the first element they consider and the cornerstone of expanding their business.

The above are the key points I want to share with you about the payment track. If you have any more detailed questions, please contact us further.