As stablecoin adoption grows, rigorous regulatory oversight is becoming a key factor in determining which firms can be trusted to safeguard assets and process transactions securely. However, not all stablecoin payment providers operate under the same standards.

Many claim to be "licensed," but in reality, they operate under minimal oversight—often misleading clients into a false sense of security. This lack of clarity puts businesses and customers at serious risk, exposing them to potential security breaches, fraud, and  financial losses. Understanding the difference between a properly licensed provider and one that is merely registered for Anti-Money Laundering (AML) reporting purposes is crucial for making informed decisions.

‍

Licensed vs. Registered: Why the Difference Matters

Some stablecoin payment firms promote their compliance credentials, but what does this actually mean? There is a crucial difference between firms holding full financial licenses and those operating under basic  AML registrations.

Fully licensed firms, such as those with the Gibraltar Distributed Ledger Technology (DLT) License or Estonia Virtual Asset Service Provider (VASP) License, must adhere to strict financial and operational standards. These licenses involve ongoing audits, capital adequacy requirements, cybersecurity controls, and enhanced AML measures—all designed to help protect consumers and ensure financial stability.

By contrast, some firms operate under basic AML registrations, which only require them to report suspicious activities—without enforcing capital requirements, cybersecurity controls, or asset protection requirements. Many misleadingly claim to be "licensed" when, in reality, they operate with minimal accountability and lack the safeguards that fully licensed firms must uphold.

This distinction is critical, as proper licensing provides:

• Stronger customer protection
• Greater financial stability
• Tighter regulatory compliance
• Reduced risk exposure

Without these safeguards, underregulated providers expose customers to serious financial risks—including fraud, data breaches, money laundering, and even criminal liability.

‍

The Risks of Working with Underregulated Providers‍

‍
1. Asset Vulnerability

Without regulatory oversight, mismanagement or fund misappropriation is far more likely. Clients could face complete asset loss if an unregulated provider collapses or operates fraudulently. The FTX collapse in 2022 is a stark reminder of how unprotected customer funds can be exploited.

‍

2. Security Weaknesses & Data Breaches

Underregulated providers often lack stringent cybersecurity measures, making them easy targets for hacks and data breaches. Many crypto exchanges and payment firms have collapsed due to poor security infrastructure, leaving customers without recourse. If a provider is hacked, the level of security measures in place will determine whether customer funds are at risk or lost entirely.

‍

3. Exposure to Financial Crime & Criminal Liability

Lightly regulated providers in high risk countries may unknowingly or deliberately facilitate illicit financial activities, including money laundering, terrorist financing, and transactions involving sanctioned entities. Without strict AML and compliance controls, firms risk becoming conduits for criminal activities—also potentially exposing their customers to legal and regulatory consequences.

‍

4. Lack of Legal Protection

If an underregulated firm fails or mismanages funds, businesses have little to no legal recourse due to weak or nonexistent enforcement mechanisms. Without clear protection laws or dispute resolution frameworks, recovering lost assets can be nearly impossible.

‍

What Proper Licensing Means for Your Business

A licensed stablecoin provider must implement several key protections to ensure compliance and reduce risk:

‍
1. Client Asset Protection

Ensuring proper licensing is crucial for stablecoin providers to maintain compliance and mitigate risks. A key aspect of this is client asset protection, which requires segregating customer funds from operational funds. This reduces the risk of mismanagement or fraud, ensuring client assets remain secure even in cases of company insolvency.

The collapse of FTX in 2022 highlights the consequences of inadequate protections. The exchange filed for bankruptcy after misappropriating customer funds, preventing withdrawals.

‍

2. Financial Oversight & Capital Requirements

This level of oversight prevents scenarios where providers run out of liquidity, leaving customers stranded.

‍

3. Cybersecurity & Fraud Prevention

Regulated firms are mandated to conduct regular cybersecurity audits, penetration testing, and implement robust fraud prevention policies to safeguard digital assets from hacking and operational risks. 

‍

4. Strict AML & Compliance Standards

Licensed cryptocurrency firms adhere to stringent Anti-Money Laundering (AML) frameworks, Know Your Customer (KYC) policies, and comply fully with the Travel Rule, ensuring transaction traceability and reducing exposure to illicit financial activities. Conversely, lightly regulated providers often lack these safeguards, making them vulnerable to money laundering risks.

‍

Choosing the Right Provider: Security Over Short-Term Savings

For businesses seeking long-term security in the stablecoin space, the choice is clear: work only with fully licensed firms operating in the reputable jurisdictions that uphold financial, security, and legal standards. A proper license does more than validate a company’s credibility—it safeguards client assets, ensures operational stability, and reduces exposure to financial crime.

While some underregulated providers may appear more cost-effective, businesses must consider the broader risks beyond price. Security, compliance, and legal protections should be top priorities when choosing a stablecoin payment provider. By verifying a provider’s licensing status and understanding the protections in place, businesses can make informed decisions that support long-term success and financial security.

‍

Important: This communication is for informational purposes only and does not constitute financial or investment advice. It is intended exclusively for eligible corporate clients outside the UK and high net worth companies. Cryptocurrencies are highly volatile and carry significant risks, including potential total loss. Past performance is not a guarantee of future results. Seek independent professional advice before investing. Crypto-asset products and services mentioned here are not authorised or regulated by the UK FCA. These investments may lack the protections of FCA-regulated products.