Whitepaper
10. Regulatory Compliance
10. Regulatory Compliance*
* Chapter 10 is dedicated for Terra Classic Validators and developers, rather than end user.
10.1. Executive Summary
This chapter examines the regulatory landscape for USTD in the context of the GENIUS & STABLE Act as well as MiCA. Under the GENIUS & STABLE Act, “payment stablecoins” are strictly defined as digital assets intended for everyday transactions, issued by legally accountable entities that meet rigorous reserve, oversight, and redemption requirements. Although USTD features a fixed redemption mechanism, its primary design solely focuses on yield generation, collateralization, and serving as a store of value. Furthermore, USTD’s collateral—comprising USDC and USDT—may exhibit slight fluctuations that undermine the exact 1:1 stability expected of payment stablecoins. As such, USTD would likely be classified as a non-payment stablecoin under the GENIUS & STABLE Act, meaning it falls outside the framework intended for permitted payment stablecoin issuers and would not be authorized for payment purposes under that regulation.
Regarding MiCA, the regulation’s broad scope encompasses a wide range of crypto-assets, including those not designed solely for payments. However, MiCA also imposes stringent issuer requirements—demanding an identifiable legal entity responsible for governance, transparency, and ongoing disclosure. USTD’s fully decentralized structure, which lacks a centralized issuer, creates a significant compliance gap. Without a designated legal reporting entity, USTD would struggle to meet MiCA’s accountability and risk management obligations, potentially rendering it non-compliant despite its technical merits.
In summary, USTD’s fully decentralized design positions it outside the narrow regulatory scope of the GENIUS & STABLE Act, which is tailored for permitted payment stablecoin issuers. For USTD it is a trade-off between regulatory burden and flexibility, as it avoids the stringent requirements imposed on traditional payment stablecoins—allowing USTD to focus on yield generation, collateralization, and serving as a store of value. While MiCA’s broad framework still necessitates accountability through identifiable issuers, this challenge can possibly in the future be addressed by appointing a dedicated legal reporting entity. In this way, USTD can maintain its innovative, decentralized nature while potentially in the future meeting essential regulatory obligations, ultimately opening up new opportunities for market innovation within the stablecoin and DeFi ecosystem.
10.2. Classification dilemma
The GENIUS and STABLE Act were designed specifically to regulate stablecoins that serve as payment instruments. Under its framework, a “payment stablecoin” is defined by certain strict criteria related to its function, redemption mechanism, and stability relative to a fiat currency. In contrast, stablecoins that do not meet these criteria—whether by design or function—would not be classified as payment stablecoins under the Act.
10.2.1. Definition of Payment Stablecoin in the GENIUS and STABLE Act
“(15) PAYMENT STABLECOIN. — The term ‘payment stablecoin’ means a digital asset—
(A) that is or is designed to be used as a means of payment or settlement;
(B) that is denominated in a national currency;
(C) the issuer of which—
(i) is obligated to convert, redeem, or repurchase it for a fixed amount of monetary value; or
(ii) represents that the digital asset will maintain — or creates the reasonable expectation that it will maintain — a stable value relative to the value of a fixed amount of monetary value; and
(D) that is not—
(i) a national currency;
(ii) a security issued by—
(I) an investment company registered under section 8(a) of the Investment Company Act of 1940; or
(II) a person that would be an investment company under that Act but for paragraphs (1) and (7) of section 3(c);
(iii) a deposit (as defined in section 3 of the Federal Deposit Insurance Act), regardless of the technology used to record the deposit; or
(iv) an account (as defined in section 101 of the Federal Credit Union Act), regardless of the technology used to record the account."
10.2.2. Characteristics of Non-Payment Stablecoins
By contrast, a stablecoin that does not meet these key criteria would not be classified as a payment stablecoin. In general, non-payment stablecoins might exhibit one or more of the following characteristics:
• Lack of Redemption Obligation: They may not offer a fixed redemption mechanism. Instead of promising to exchange tokens at a set value for fiat currency (or another asset), these stablecoins might have algorithmic or other mechanisms that do not guarantee a fixed value (in other words can have “fluid” value).
• Alternative Primary Uses: They might be designed primarily as a store of value, for yield generation, or as collateral in decentralized finance (DeFi) systems rather than as a medium of exchange. Their operational focus could be on providing yield, facilitating collateralization, or serving niche financial functions.
• Different Risk Profiles: Without the fixed redemption feature, such stablecoins inherently carry different risks. They may be more volatile or subject to market dynamics that do not prioritize immediate liquidity, and hence are not intended to serve as everyday payment instruments.
The GENIUS and Stable Act specifically targets the stability and liquidity features inherent to payment stablecoins. Therefore, if a stablecoin’s design or intended use does not align with these features, it would be considered a non-payment stablecoin for regulatory purposes.
10.2.3. Regulatory Rationale and Implications
Regulatory Focus:
The rationale behind the GENIUS & STABLE Act’s narrow focus on payment stablecoins is rooted in consumer protection, market stability, and the smooth operation of payment systems. Coins that are primarily used for everyday transactions and settlements require robust safeguards (such as mandatory redemption at a fixed value) to prevent disruptions in the payment ecosystem.
Implications for Non-Payment Stablecoins:
• Different Regulatory Treatment: Stablecoins that fall outside the payment stablecoin definition might be subject to different regulatory regimes or might require a separate classification that reflects their distinct functional and risk characteristics.
• Market Innovation: By distinguishing between payment and non-payment stablecoins, regulators can tailor oversight in a way that supports innovation in areas like yield-bearing or algorithmic stablecoins while maintaining the integrity of the payment system.
10.2.4. Conclusion:
Stablecoin can be considered a non-payment stablecoin under the GENIUS & STABLE Act if it does not meet the specific criteria set out for payment stablecoins. That is, if a stablecoin is not primarily designed to be used as a means of payment or settlement, or it lacks the obligation for fixed-value redemption, it would fall outside the narrow regulatory scope of the GENIUS Act intended for payment stablecoins.
10.3. GENIUS & STABLE Act
10.3.1. Analysis of the USTD Design Scenario
Prong (1) Designed for payment/settlement:
• Fails to meet prong. Without a payment purpose the first prong fails.
Prong (2) Denominated in national currency:
• Meets prong. Every token is minted “1 USTD = 1 USD” against USDC/USDT collateral STD - Decentralized and fully automated yield-bearing stablecoin.
Prong (3-a) Fixed-value redemption obligation:
• Fails to meet prong. Redemption is for another token, not for a fixed dollar amount. Redeemable only for the underlying USDC/USDT, whose market price routinely drifts between ≈ $0.9980 and $1.001—sometimes farther—so the holder cannot demand exactly $1.00 in legal tender.
Prong (3-b) Expectation of stable $1 value:
• Peg stability relies on collateral whose own price wobbles (The value “may vary” and offers no guarantee of par redemption). Borderline at best. Regulators would likely say the expectation is not sufficiently fixed.
(Issuer) presence of a legally accountable issuer:
• Control rests with Terra Classic on-chain governance, not a corporate entity. No issuer ⇒ prongs 3 & down-stream licensing impossible.
Prong (4) Not in an excluded category:
• Fails to meet prong. USTD is neither currency, bank deposit, nor registered fund.
10.3.2. Conclusion
Because USTD fails prong (1) (no payment design), fails prong (3-a) (no right to a fixed dollar redemption), and lacks any legally accountable issuer to satisfy prong (3) or obtain the mandatory license, it does not meet the Acts’ definition of a “payment stablecoin.”
USTD would be classed—if at all—as a “non-payment stablecoin,” sitting outside the regulatory lane reserved for permitted payment stablecoins.
10.3.3. Potential effects of not falling under the regulatory scope of the GENIUS & STABLE Act
It can be positive for USTD that it does not fall under the GENIUS & STABLE Act, but only if its intended use and marketing clearly distinguish it from a “payment stablecoin.” The GENIUS & STABLE Act are designed to regulate payment stablecoins—that is, tokens used primarily as means of payment or settlement and issued by legally accountable entities that meet strict regulatory standards. UST Protocol’s design focuses on yield generation, collateralization, and serving as a store of value rather than facilitating everyday payments. Because it is fully decentralized and does not have a central legal issuer, USTD is likely to be classified as a non-payment stablecoin under the GENIUS & STABLE Act.
Implications:
a.) Positive Aspect:
Since USTD would fall outside the narrow scope of the GENIUS & STABLE Act (which are intended for permitted payment stablecoin issuers), it avoids the regulatory burdens imposed on traditional payment stablecoins. This means USTD can potentially launch and operate without having to meet the stringent requirements (e.g., 1:1 reserve backing by high-quality liquid assets, mandated oversight by approved financial institutions, and regular reserve certifications) that apply to payment stablecoins. For a project that primarily focuses on yield generation and collateral-based value preservation, this can be a strategic advantage.
b.) Regulatory Caution:
However, it is critical that USTD’s marketing and usage clearly reflect its definition (utility token, not security token) and purpose as a yield-bearing and value-stable asset—not as a means for everyday payments. If USTD is marketed or used in a manner that implies payment functionality, or should regulators conclude that USTD operates de facto as a payment stablecoin, enforcement action may follow—forcing compliance, reclassification, or operational restructuring.
Conclusion:
For USTD, being outside the GENIUS & STABLE Act’s scope is beneficial as long as the project is positioned and used primarily as a non-payment stablecoin focused on yield generation and collateralization. This approach avoids the heavy regulatory requirements for permitted payment stablecoin issuers, thereby lowering compliance costs and operational burdens. Nonetheless, the project must maintain clear boundaries in its design, marketing, and use-case to prevent any regulatory reclassification that might trigger GENIUS & STABLE Act requirements.
10.4. MiCA
10.4.1. Does a Fully Decentralized, Non-Payment USTD Stablecoin Fall Under MiCA?
Definite Answer:
USTD would not fall under MiCA if it is neither offered to the public in the EU nor admitted to trading on regulated platforms. However, it may still be considered within scope if marketed or made accessible to EU consumers through DeFi interfaces.
Explanation:
a.) MiCA’s Broad Scope:
MiCA (“Markets in Crypto-Assets Regulation”) is designed to provide a comprehensive regulatory framework for a wide range of crypto-assets. Its scope is broad enough to cover many types of tokens—even those that are not used primarily as a medium of payment. The regulation targets crypto-assets offered to or used by EU consumers, which includes stablecoins, asset-referenced tokens, and other crypto-assets that do not qualify as financial instruments under existing frameworks.
b.) Classification Beyond Payment Stablecoins:
While MiCA establishes distinct categories for payment stablecoins (typically those with strict redemption mechanisms ensuring a fixed fiat peg), it also addresses other stablecoins and crypto-assets that may serve alternative purposes (such as yield generation, serving as a store of value, or as collateral in DeFi protocols). In our scenario, USTD is described as:
• Fully decentralized: Issued and governed by the decentralized Terra Classic blockchain.
• Non-payment focused: Its primary uses include yield generation, functioning as collateral, and serving as a store of value rather than everyday payments.
• Stablecoin Nature: It is designed to maintain a stable value (albeit through mechanisms that might not guarantee an exact 1:1 peg) via collateralization with assets like USDC/USDT.
Even though it is not a payment stablecoin in the narrow sense defined by MiCA, it is still a crypto-asset that falls within the regulatory perimeter. MiCA does not exclude tokens solely because their primary function is not payments—it regulates crypto-assets that are offered to the public or traded on regulated platforms.
c.) Decentralization Consideration
MiCA was primarily drafted to make the market transparent and safe, with the idea of regulating tokens where a central issuer is identifiable. However, in practice, many crypto-assets (including decentralized stablecoins) are offered in the market. While the regulation imposes issuer requirements (e.g., transparency, governance, and risk management), the broad wording means that even fully decentralized tokens are not “out of scope” if they are accessible to EU market participants. In short, if UST is traded or offered in the EU, it would come under the MiCA framework regardless of its decentralization.
10.4.2. Is the Fully Decentralized, Non-Payment USTD Stablecoin Likely to Be Compliant with MiCA?
Definite Answer: Likely not.
Explanation:
a.) Issuer Requirements and Accountability
MiCA imposes a host of obligations on crypto-asset issuers, including detailed requirements on governance, transparency, risk management, and consumer protection. For example, if a token is classified as an asset-referenced token (a likely category for a stablecoin not used primarily for payments), the issuer must publish a detailed whitepaper, hold sufficient capital reserves, and comply with ongoing disclosure and reporting obligations.
b.) The Challenge of Full Decentralization
A fully decentralized protocol (like the proposed UST Protocol) is characterized by the absence of a central, identifiable issuer or entity that can be held accountable for compliance. In such a model:
• No Central Control: There is no legal entity that can implement, monitor, or be responsible for the mandatory disclosures and operational safeguards required by MiCA.
• Governance Ambiguity: The decision-making process is distributed across network participants rather than managed by a regulated management team or board.
Because MiCA’s framework is built around the concept of an issuer that can be regulated, a token that is entirely decentralized faces a structural challenge. Without a legally identifiable issuer, it is difficult—if not impossible—to ensure that all MiCA requirements (such as those for capital reserves, risk management, and consumer protection) are met.
c.) Legal and Regulatory Implications
If a crypto-asset falls within MiCA’s scope but cannot meet the prescribed issuer obligations because it is fully decentralized:
• Non-Compliance Risk: The token would not satisfy the regulatory criteria set out in MiCA.
• Legal Uncertainty: This non-compliance might render the token “illegal” or at least expose it to enforcement actions in the EU market, unless regulators provide a carve-out or exemption for truly decentralized systems—a point that remains under debate in policy circles.
Thus, even though the USTD stablecoin would fall under MiCA, its fully decentralized nature and its design as a non-payment asset mean it would likely not be compliant with the issuer-specific provisions of MiCA, thereby challenging its legal status under the regulation.
10.4.3. Consequences of USTD Not Being MiCA-Compliant
If USTD is not compliant with MiCA, it would primarily restrict its use in regulated channels (such as listing on centralized exchanges and other EU-regulated platforms) rather than banning its onchain existence or decentralized DeFi use. However, non-compliance also carries legal risks that may result in enforcement actions against any entity attempting to offer it as a regulated service.
Detailed Analysis
a.) Regulated Market Access:
MiCA establishes a framework for offering crypto-assets to EU consumers. A non-compliant USTD would likely be barred from being listed on centralized exchanges (CEXs) or other regulated platforms operating in the EU. This is because such platforms are required to offer only compliant products to protect investors and ensure market integrity.
b.) Onchain and DeFi Usage:
The decentralized nature of USTD means that its existence on a public blockchain or use within decentralized finance (DeFi) protocols is not directly prohibited by MiCA. Many decentralized protocols operate outside the immediate scope of MiCA enforcement if they do not involve a regulated issuer or intermediary.
However, while USTD might continue to be traded or used onchain, any attempt to integrate it with regulated financial services or market infrastructure in the EU would be problematic.
c.) Legal and Enforcement Risks:
Even if USTD remains “onchain” or in decentralized environments, non-compliance can expose developers or affiliated entities to potential legal actions if it would be offered or distributed n the EU CEXs or offer it through regulated channels.
In summary, non-compliance means:
• Restricted access to regulated markets: You may not be able to list USTD on EU-based CEXs or offer it through regulated channels.
• Continued onchain existence: USTD could still exist and be used in DeFi, but its legal status remains uncertain, and participants might face risks if regulators intervene.
10.4.4. Possibility of MiCA Compliance Without a Centralized Reporting Entity
Even if UST Protocol has a detailed whitepaper, sufficient capital reserves, and transparent onchain disclosures, the absence of a centralized legal entity responsible for regulatory reporting would prevent full MiCA compliance.
10.4.5. Possibility of Appointing a Centralized Entity for Reporting Purposes
In the absence of an inherent centralized legal entity within Terra Classic, it is possible to establish or appoint a separate legal entity (or hire a third-party service) to assume the reporting and compliance responsibilities required by MiCA.
Detailed Analysis
a.) Role of a Reporting Agent:
Many decentralized projects have considered or implemented “hybrid” models where a legal entity is formed specifically to serve as the compliance and reporting agent. This entity would:
• Produce periodic reports,
• Manage disclosures, and
• Act as the official point of contact with EU regulators.
b.) Legal Feasibility:
By contracting or establishing a centralized entity dedicated to MiCA obligations, USTD could satisfy the accountability and reporting requirements even if the underlying protocol remains decentralized. Such an entity would be legally recognized, capable of handling regulatory communications, and accountable for any failures to meet MiCA standards.
c.) Practical Considerations:
• Structure: The reporting entity would need to be structured in compliance with EU legal standards and be subject to supervisory oversight.
• Governance: Clear governance arrangements must be in place to ensure that the reporting entity accurately reflects the operations and risks of the decentralized protocol.
• Integration: This approach is becoming increasingly common in the crypto space, as regulators look to balance innovation with investor protection.
d.) Conclusion for This Scenario:
Therefore, if Terra Classic (or the UST Protocol) lacks a centralized reporting mechanism, hiring or establishing a dedicated legal entity to perform these tasks would be a viable route to achieve MiCA compliance. This solution would bridge the gap between a decentralized technical architecture and the regulatory requirement for an accountable issuer.
10.5. Jurisdictional Access & User Self-Liability
To ensure every wallet that connects to the UST Protocol does so in full awareness of its local legal obligations, the protocol should enforce a mandatory user-acknowledgement step. This mechanism protects both end-users and the broader ecosystem from inadvertent regulatory breaches.
10.5.1. Access Limitation & Consent Flow
First-connection gate:
• When a user launches the dApp and connects a wallet for the first time, the interface displays a pop‑up titled “Jurisdiction & Compliance Notice.” The pop‑up requires the user to 1.) Self‑declare their jurisdiction by selecting their country of residence from a drop‑down list. 2.) Confirm legal eligibility by ticking a box that states:“I attest that accessing, holding, or interacting with USTD is lawful in my jurisdiction and I accept the Terms of Use.”. By ticking a box the user signs (or approves) a non-gas-spending message in their wallet before any contract functions (mint, redeem, or claim-yield) are enabled.
• Self‑certification mitigates—but does not eliminate—legal risk for individual users or for ecosystem participants. Each user remains responsible for complying with their own local laws.
• No geo‑blocking - The protocol itself does not impose automatic geo‑blocking. Instead, it relies on the above jurisdictional self‑declaration to manage compliance across multiple regulatory regimes while preserving decentralised access. This design balance—open by default, yet accompanied by explicit legal consent—reflects best‑practice advice from external counsel and will be reviewed periodically as regulations evolve.
Rolling reminder:
• Every 90 days—or sooner if the front-end detects a change in the user’s IP-region—the notice is re-presented for re-confirmation.
10.5.2. Rationale for User Self-Attestation:
Jurisdictional Complexity:
• Global regulatory frameworks—including the EU’s MiCA, the US GENIUS Act, and the STABLE Act—impose diverse legal standards. In the absence of centralized compliance infrastructure, decentralized protocols cannot feasibly enforce jurisdiction-specific rules on-chain.
Mitigating Legal Exposure:
• Requiring explicit user acknowledgment before enabling access to smart contract functions helps reduce the legal risk of the protocol being construed as “offering” a regulated product in restricted markets. This mechanism serves as a legal buffer for contributors, front-end operators, and governance participants.
Promoting User Accountability:
• The acknowledgment process reinforces informed decision-making by prompting users to consider their legal obligations. It is inspired by appropriateness checks in traditional finance, adapted for a permissionless, decentralized context.
10.6. USTD marketing
When we say that USTD could not be marketed to EU customers if it lacks the appropriate MiCA authorization, it means that any active promotion or advertising targeting EU consumers would be seen as offering an unapproved financial product. Here are some examples of what that entails:
Direct Advertising:
• This includes any advertisements (online, print, TV, or radio) that encourage EU residents to buy, mint, or otherwise use USTD. Such ads could be interpreted as actively offering an unlicensed stablecoin product.
Promotional Content:
• Website pages, social media posts, newsletters, or press releases that target or mention EU markets or EU residents. Even if not directly selling the product, these communications could be viewed as marketing USTD to an audience in a regulated jurisdiction.
Partnership Announcements:
• Announcing or promoting partnerships with EU-based platforms (like centralized exchanges or payment processors) that would involve USTD could also be considered marketing toward EU customers.
Investor or Retail Outreach:
• Hosting webinars, roadshows, or in-person events in the EU to discuss USTD’s features and benefits would fall under this category.
In practical term it would be advised to avoid any activities that could be interpreted as trying to capture EU market interest—such as listing USTD on EU-based centralized exchanges or creating targeted marketing campaigns for EU audiences. This approach is a stopgap measure designed to mitigate legal risks until a compliant structure or licensing is obtained.
However is possible for USTD to maintain an informational website and host social media events (such as X Spaces) that provide detailed explanations of what USTD is, its underlying technology, tokenomics, and use cases, as long as the content is not specifically tailored or targeted to encourage EU users to acquire or use USTD.
Educational or technical materials may still be published under freedom of expression—but should be coupled with legal disclaimers and never include a call-to-action (CTA) for EU audiences.
To elaborate:
Website Content:
• A generic, publicly accessible website that describes UST Protocol’s concept, architecture, and ecosystem is acceptable under free speech and informational purposes. However, to avoid running afoul of MiCA restrictions in the EU, the website should include clear disclaimers stating that USTD is not offered or available for purchase or redemption in jurisdictions where such activity is restricted by law, including the European Union, unless and until appropriate regulatory approvals are obtained.
Social Media and Public Forums:
• Similarly, organizing discussion spaces (like X Spaces) or running social media channels that focus on technical discussions, community updates, and educational content is generally permitted. The key is to ensure that these discussions do not actively promote or imply that EU users can legally purchase, mint, or redeem USTD through compliant channels. In other words, the content should be purely informational rather than promotional—avoiding language that would encourage EU residents to use USTD where it isn’t authorized.
In both cases, the goal is to provide transparency and information about UST Protocol’s technology and ecosystem without engaging in marketing practices that could be seen as offering an unlicensed financial product to EU consumers.
10.7. Links
MiCA documentation:
GENIUS Act documentation:
https://www.hagerty.senate.gov/wp-content/uploads/2025/02/GENIUS-Act.pdf
STABLE Act documentation:
https://www.congress.gov/bill/119th-congress/house-bill/2392/text