Authors of this article: Jayden Shao, Hongde Zheng
On April 25, the Mankun Law Firm, in collaboration with Techub News, Mobile Payment Network, Web3Hub, and BlockbeatHK, successfully held a themed salon in Qianhai, Shenzhen titled "How Traditional Payments Transform to Web 3.0: Innovative Paths and Compliance Practices." The event focused on the potential of PayFi as a hub connecting Web2 and Web3, delving into innovative paths and compliance practices against the backdrop of global fintech restructuring and the maturity of on-chain payments. How does payment "go on-chain"? How is the global regulatory trend evolving? How can PayFi truly be implemented? These questions became the focal points of heated discussions among the attendees.
Jayden Shao, equity partner at Mankun Law Firm, delivered a presentation titled "Starting from Stablecoins: The Compliance Path for Traditional Payment Institutions to Transform to Web3."
This article is organized from Lawyer Shao's speech, combining Mankun's practical experience in the Web3 field, systematically analyzing the past and present of stablecoins, global regulatory trends, and compliance key points in the crypto payment sector, providing references for traditional payment institutions transforming to Web3. Below are the contents of the speech.
Lawyer Jayden Shao: Hello everyone, it is a great honor to discuss a very important topic with you today—stablecoins and how traditional payment institutions can transform to Web3. When talking about crypto payments, stablecoins are an unavoidable topic; before discussing crypto payments, we must first address compliance, which is the reason for compliance being prioritized. I will elaborate on three aspects: the past and present of stablecoins, global regulatory trends, and compliance key points in the crypto payment sector. Now, I will begin my presentation.
Part 1: The Past and Present of Stablecoins
Stablecoin 1.0: Centralization and Controversy—Taking USDT as an Example
Today, from a compliance perspective, I categorize the past and present of stablecoins into four versions. The first is the Stablecoin 1.0 era, with USDT as a typical representative. Everyone is familiar with it; when mentioning "U," it usually refers to USDT. USDT emerged in 2014, characterized by centralized issuance, fiat currency anchoring, and controversies over opaque reserves.
USDT's journey has been quite tumultuous, with two typical incidents. In 2017, USDT was exposed for sharing a bank account with its affiliated company Bitfinex. To cover an $850 million deficit, Bitfinex borrowed funds from Tether's reserves without users' knowledge. This matter was investigated by the New York Attorney General, forcing Tether to settle judicially with a $18.5 million fine.
Under pressure, Tether publicly disclosed its reserves for the first time, revealing that only 3% was cash, while over 60% consisted of commercial papers and other high-volatility assets, causing an uproar in the market. Market panic led to a wave of redemptions in the secondary market, causing USDT to decouple to $0.96. Historically, USDT has experienced multiple decouplings and redemption waves, but the situation has gradually improved in recent years. From a significant decoupling in 2015 to six peaks of decoupling in 2019, it has become more stable in recent years.
In summary, USDT can be described as: first seizing the market, then supplementing compliance. Currently, USDT remains the leader in the stablecoin industry, holding a 70% market share.
Stablecoin 2.0: Compliance as the Foundation—Taking USDC as an Example
The representative of Stablecoin 2.0 is USDC, which began issuance in 2018, characterized by compliant registration, 100% cash or treasury reserves, and continuous auditing. Unlike Tether's aggressive approach, USDC's issuer Circle adopts a "gentleman" route.
Circle has obtained MTL licenses in over 40 states in the U.S., applying for licenses state by state, making it the licensed stablecoin issuer with the most licenses in the U.S. Based on this compliant approach, Circle collaborates smoothly with payment institutions and gains trust, such as its deep cooperation with Visa. Circle is also the first stablecoin issuer fully compliant with the EU's MiCA regulations. Last year, USDT was delisted in the EU, while Circle became the first compliant stablecoin recognized by the EU.
In summary, Circle does not have the coolest algorithm but possesses the most solid trust, the strictest licenses, and the strongest partners. Circle has set a benchmark for other stablecoins and is the first stablecoin to achieve MiCA compliance.
Stablecoin 3.0: The Failure of Algorithms—Taking Terra USD as an Example
Stablecoin 3.0 represents the era of algorithmic stablecoins, with TerraUSD (UST) as a typical representative. However, this version seems to have taken a wrong turn in the tech tree, characterized by being uncollateralized or partially collateralized, relying on algorithms to adjust the coin price and maintain its peg to the U.S. dollar or other currencies.
However, in 2022, TerraUSD collapsed, exposing the systemic risks of algorithmic stablecoins. Terra and its sister coin Luna entered a death spiral due to massive market fluctuations, with the coin price plummeting from $1 to $0.1, resulting in a $45 billion loss for investors. Project founder Do Kwon was extradited to the U.S. in March 2023, facing multiple charges including securities fraud, commodity fraud, and telecommunications fraud.
This teaches us that algorithmic stablecoins fail due to the absence of redemption, compliance, and responsible parties, leading to failure in a regulatory vacuum. The lesson from TerraUSD is: without reserves, there is no trust; without law, there is no anchoring. Stablecoins require top-down regulation to instill trust in users.
Stablecoin 4.0: Entry of Payment Giants—Taking PYUSD as an Example
Next is the Stablecoin 4.0 era, starting in 2023, with PYUSD as the most typical example. Its characteristic is that traditional payment giants are beginning to issue stablecoins, embedding them into payment scenarios and strengthening the regulatory framework.
I will take PayPal as an example; PYUSD is a stablecoin launched by PayPal in collaboration with Paxos Trust. Everyone knows that PayPal is a well-established payment institution, and Paxos is a trust institution. They collaborate using a front-store and back-factory model for issuance. PYUSD has also become the first dollar stablecoin fully regulated by the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the New York Department of Financial Services, pioneering a compliance model that combines trust structures with multi-departmental collaboration.
PYUSD has another feature: it embeds compliance legal requirements into smart contracts, reserving compliance control interfaces, such as freezing addresses, recalling, and asset whitelist filtering functions, integrating regulatory technology concepts into code, enabling proactive compliance, such as freezing money laundering addresses and cooperating with sanction compliance as needed.
In summary, PYUSD is the first stablecoin issued by a trust institution, embedded in payment scenarios, with compliance written into code.
Part 2: Global Regulatory Trends for Stablecoins
Next, I would like to share with you the current global attitude towards stablecoins. Are they compliant or non-compliant? What types of institutions can issue stablecoins? What are the requirements? I have created a table summarizing the stablecoin policies of major global laws.
Currently, there are five major legal jurisdictions with relatively clear legislation on stablecoins, with the EU, Singapore, and Japan leading the way. They have already implemented stablecoin-related regulations in 2023 and 2024. The U.S. and Hong Kong are also expected to introduce stablecoin legislation this year, with the U.S. currently under review in both the House and Senate.
What are the similarities and differences in stablecoin legislation among these five typical jurisdictions? I have made a comparison based on who can issue coins, capital requirements, anchorable currencies, reserve custody, audit frequency, and redemption requirements.
First, looking at who can issue coins, Japan is quite strict, limiting issuance to financial institutions such as banks or trust companies. Other regions are broader; besides typical financial institutions like banks, other types of tech companies can also issue coins if they obtain the corresponding licenses.
Regarding capital requirements, the EU currently does not have a unified registered capital requirement, allowing each member state to set appropriate capital requirements. In Singapore, if a non-bank institution issues coins, it must have at least 1 million Singapore dollars or a capital requirement equivalent to 50% of annual operating expenses. In Japan, since it is a financial institution issuing coins, it only needs to meet the existing capital threshold. The U.S. has not yet unified its requirements, while Hong Kong's current draft suggests a requirement of 25 million Hong Kong dollars or 1% of the circulating stablecoin's face value, whichever is higher.
In terms of anchorable currencies, the U.S. is relatively strict, allowing only the anchoring of the U.S. dollar, indicating that the U.S. wants to continue promoting the on-chain dollar hegemony. Other regions are relatively lenient; the EU, Singapore, and Japan can issue stablecoins anchored to their local fiat currencies, G10 single currencies, or other fiat currencies. Hong Kong is also relatively strict, primarily using the Hong Kong dollar, while anchoring other foreign currencies requires case-by-case discussions.
Regarding reserve custody requirements, there is a general consensus that requires 1:1 full reserves, consisting of highly liquid and stable assets, with independent custody being a requirement.
In terms of audit frequency requirements, the judicial regions vary; Hong Kong is relatively lenient, requiring only annual audits in its draft, but currently mandates monthly compliance progress reports during sandbox testing, with future changes yet to be revealed.
Redemption requirements are generally strict, typically allowing for immediate redemption or T+5, T+1 scenarios.
Commonalities and Differences in Regulation
From the above analysis, the global regulatory approaches to stablecoins in these major jurisdictions share four common points:
Full reserves and independent custody, which are the most basic requirements;
Immediate redemption requirements, even if the specifics vary by jurisdiction, generally not exceeding five working days;
Directly or indirectly prohibiting algorithmic stablecoins, as most regulatory agencies see algorithmic stablecoins as unfeasible, with past failures and an inability to meet full reserve requirements;
Prohibiting interest-bearing stablecoins, which the U.S. explicitly bans, while other regions' legislation also makes it difficult to issue interest-bearing stablecoins, as they are essentially securities-like products that may be classified as securities or investment products.
I have also summarized the differences among the jurisdictions:
EU: The most systematic regulation, easiest for cross-border operations; as long as a license is obtained from one of the 27 EU countries, it can be used across all 27 countries;
Singapore: The legislation was introduced relatively early, with many rules but flexibility, suitable for pilot projects, detailed regulation, and clear processes; issuers do not have to be banks, tech companies can also issue coins;
Japan: Banks dominate the market; only financial institutions can issue stablecoins, limiting innovation space;
U.S.: The policy is complex, with a dual-track regulatory mechanism of federal and state regulations running in parallel. However, the U.S. is currently the most active market for crypto funds, with enormous potential;
Hong Kong: The system is in progress, with legislation expected to be introduced by 2025, and the policy is relatively friendly. At this stage, companies can operate while obtaining licenses, such as Yuan Coin and JD stablecoin testing local scenarios in the sandbox, which can be expanded to Southeast Asia after the legislation is introduced.
Part 3: The Crypto Payment Sector and Compliance Key Points
Segmentation of the Crypto Payment Sector
Having discussed stablecoins, the attendees are mostly from payment institutions, likely interested in transforming to crypto payments. Not everyone may want to issue stablecoins, but they may want to explore other areas in the payment sector. Next, let’s discuss the playable scenarios in the payment sector.
I have outlined the segmentation of the crypto payment sector. Since crypto payments are based on stablecoins, DeFi, and programmable technology, there are many products that can be developed, which can be divided into six major modules:
Merchant payment access and settlement;
Underlying payment networks and clearing infrastructure;
Custody or account services;
Payment solutions for vertical scenarios, which can create niche markets;
Support for compliance and data, such as Beosin, which focuses on KYT compliance systems;
Value-added services in the payment ecosystem.
These six major modules contain many subfields, indicating that there is a lot of playability in crypto payments. Compared to traditional payments, there are many more avenues to explore, delve into, or create new paths.
Licensing Issues
The first compliance issue that everyone is concerned about when entering crypto payments is licensing, which I believe is the first question that all institutions think of. I have compiled a panoramic view of the current global licensing situation related to crypto payments into a table, including types such as crypto custody, payment exchange, stablecoin issuance, and cross-border remittance licenses.
Currently, the most frequently applied licenses include: the EU's CASP or EMI licenses; the UK's payment license; additionally, Singapore's licenses, especially sought by payment institutions in Asia; Hong Kong's MSO license, which is technically a traditional currency exchange license, not a crypto payment license; and the U.S. MSB and MTL licenses. Given the global nature of crypto payments, you may also wonder: Is it enough to obtain a license from one jurisdiction to serve global users?
No, it is not. In fact, apart from the EU's MiCA passport mechanism, obtaining a virtual asset service provider license under the MiCA framework in one EU country allows for use across the other 27 countries. All other compliance licenses are only valid locally and do not automatically grant the right to conduct business with users in other jurisdictions. Having a license only protects you locally; if something goes wrong while conducting business elsewhere, the issuing jurisdiction may not take responsibility.
Another question: Is it enough to have a compliance license to operate crypto payment services without worries?
Actually, it is not. A license is just the starting point for compliance; you can only conduct business after obtaining a license, but there are many points to pay attention to during the business process. If you do not pay attention or establish relevant compliance requirements, you may face criminal risks; if you have them but do not implement them well, you may only face administrative penalties. Here are a few examples:
Coinbase's UK subsidiary was fined £3.5 million for failing to address financial crime control issues, providing electronic money services to over 10,000 high-risk customers, involving $249 million in transactions. Although they had a license, their anti-money laundering measures were inadequate.
Payeer was fined €9.3 million by Lithuania for violating anti-sanctions and anti-money laundering regulations, marking the highest fine in Lithuania's history. It allowed Russian customers to transact in rubles through sanctioned Russian banks, providing crypto wallet, account management, and storage services to Russian individuals and entities, violating international sanctions and anti-money laundering regulations.
Block Inc was fined $40 million in April 2025 for deficiencies in anti-money laundering compliance. It failed to effectively implement the U.S. Bank Secrecy Act and anti-money laundering regulations, with significant flaws in KYC procedures and transaction monitoring.
UAB Payrnet, the card service provider for CryptoPay, had its EMI license revoked, with specific details of the violations not disclosed. This indicates that in the payment sector, failing to meet compliance requirements can lead to fines and even license revocation, making it impossible to apply for a license in the future and potentially forcing one to exit the industry.
Eight Key Compliance Points
In addition to these cases, there are eight key compliance points that the crypto payment sector needs to focus on:
Anti-money laundering and compliance with regulations, as mentioned multiple times in previous cases;
Sanctions compliance; given the current international situation, everyone knows that there are many regional or individual sanctions requirements from the UN, U.S., EU, UK, or other international organizations that need to be adhered to;
Tax and accounting compliance; there are regulatory differences globally regarding whether and how to tax crypto assets, which need to be addressed according to local conditions;
Data privacy and protection; due to KYC and cross-border data flow, especially in countries like the EU that have established personal information protection laws, special attention is required;
Cybersecurity and business resilience; these are technical compliance requirements;
Consumer protection;
Third-party and outsourcing risk management; as mentioned earlier, collaborating with other institutions may lead to business impacts, disruptions, or the need to switch suppliers if those institutions face issues or have their licenses revoked;
Ongoing regulatory reporting and audit requirements.
The above summarizes the compliance focus areas that the crypto payment sector needs to pay attention to, from license applications to subsequent compliance, which is also a key service area for Mankun.
Conclusion: Compliance as the Foundation of Trust
In summary, in the Web3 payment sector, it is not a game of code and law, but rather a foundation of trust built on compliance. We see more and more payment institutions, after obtaining a license from one country or region, or after securing funding, wanting to do the first thing: expand their licenses and apply for more licenses in other jurisdictions. Compliance is often their primary consideration and the cornerstone for expanding their business.
This is what I wanted to share with you regarding the key points to pay attention to in the payment sector. If you have more detailed questions, feel free to reach out for further discussion.
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