Georgia -- Stablecoin Regulations Regulatory Overview

Georgia has established a regulatory framework for stablecoins primarily through its Law of Georgia on Virtual Assets (LoVA), adopted on June 29, 2023, and effective from January 1, 2024. This law aims to harmonize Georgia's virtual asset regulations with European Union standards, particularly the Markets in Crypto-Assets (MiCA) Regulation. The National Bank of Georgia (NBG) is the primary regulatory authority.

Here's a breakdown of the regulatory framework for stablecoins in Georgia:

Regulatory Framework for Stablecoins in Georgia

1. Classification of Stablecoins:

Georgia's LoVA adopts the EU MiCA approach, distinguishing stablecoins based on their backing:

• E-money Tokens (EMTs): Virtual assets that purport to maintain a stable value by referencing the value of one fiat currency. These are akin to electronic money and fall under the definition of "electronic money" as per MiCA if they meet certain criteria.
• Asset-Referenced Tokens (ARTs): Virtual assets that purport to maintain a stable value by referencing any other value or right, or a combination thereof, including one or several official currencies, commodities, or other crypto-assets.
• Other Virtual Assets: If a stablecoin does not fit the EMT or ART definitions (e.g., an unbacked algorithmic stablecoin), it would generally be treated as a generic "virtual asset" under the LoVA, potentially making its issuance and operation much more difficult or impossible under the licensing regime for stablecoins, as the law focuses on asset-backed tokens. If it represents a share in a company or a debt instrument, it could fall under existing Georgian securities laws.

Specific Legislation:

• Law of Georgia on Virtual Assets (LoVA), Article 3: Defines "Virtual Asset," "Virtual Asset Service Provider," and references the classification consistent with MiCA.
  • While an official English translation of the final enacted law is not immediately available from a Georgian government source, the bill version and numerous legal analyses confirm its MiCA alignment regarding ARTs and EMTs.
  • Unofficial reference for context: PwC Legal Alert on LoVA (referencing the bill, final law is largely similar)

2. Reserve Requirements:

Given the alignment with MiCA, the reserve requirements for stablecoins are expected to be stringent:

• E-money Tokens (EMTs):
  • Must be fully backed by fiat currency (e.g., Georgian Lari, USD, EUR) held in separate accounts in credit institutions.
  • The funds must be held in a way that is separate from the issuer's operating funds, ensuring segregation in case of issuer insolvency.
  • Investment of reserve funds must be in secure, low-risk assets.
• Asset-Referenced Tokens (ARTs):
  • Must be backed by a sufficient, diversified, and segregated reserve of assets.
  • The composition of the reserve assets must be resilient to market shocks and allow for redemption.
  • The assets must be held by custodians who are independent from the issuer and subject to strict regulatory oversight.
  • Issuers must have clear and detailed policies for the stabilization mechanism.

Specific Legislation:

• Law of Georgia on Virtual Assets (LoVA), which empowers the National Bank of Georgia to issue detailed secondary legislation and regulations regarding reserve requirements for specific categories of virtual assets, especially those backed by fiat or other assets. (The general principles are embedded in the LoVA, with granular rules to follow from NBG).

3. Issuer Licensing:

Issuers of stablecoins are considered Virtual Asset Service Providers (VASPs) under the LoVA and are subject to licensing by the National Bank of Georgia.

• Licensing Scope: Any entity wishing to issue ARTs or EMTs in Georgia must obtain a license from the NBG. This also applies to entities providing services related to these tokens (e.g., exchange, custody).
• Requirements: Licensing involves demonstrating:
  • Robust governance arrangements.
  • Adequate capital requirements (to be set by NBG).
  • Operational resilience and IT security.
  • Fit and proper criteria for management and shareholders.
  • Effective risk management systems, including AML/CFT compliance.
  • Clear business plans and whitepapers for the stablecoins.

Specific Legislation:

• Law of Georgia on Virtual Assets (LoVA), Chapter II, Article 7 onwards: Outlines the licensing requirements for Virtual Asset Service Providers, which includes issuers of stablecoins.
  • The NBG will issue specific regulations detailing the application process, required documentation, and ongoing obligations.
  • Official NBG website (for future regulations): National Bank of Georgia

4. Redemption Rights:

Holders of regulated stablecoins (EMTs and ARTs) are expected to have clear redemption rights:

• E-money Tokens (EMTs): Holders generally have the right to redeem their tokens at par value for the underlying fiat currency from the issuer at any time.
• Asset-Referenced Tokens (ARTs): Holders have the right to redeem their tokens from the issuer, either directly for the underlying reserve assets (or a portion thereof) or for a fiat equivalent, based on the terms outlined in the stablecoin's whitepaper and NBG regulations. The issuer must ensure sufficient liquidity in the reserve to meet redemption requests.

Specific Legislation:

• Law of Georgia on Virtual Assets (LoVA) implicitly supports redemption rights through its alignment with MiCA, which mandates such rights. Specifics will be detailed in NBG secondary legislation.

5. Algorithmic Stablecoin Rules:

Georgia's MiCA-aligned framework generally disfavors unbacked algorithmic stablecoins.

• Unbacked Algorithmic Stablecoins: Stablecoins that rely solely on algorithms and arbitrage mechanisms to maintain their peg, without significant and verifiable asset backing, would likely not qualify as either EMTs or ARTs under the LoVA's definitions. This would make it extremely challenging, if not impossible, to obtain a license for their issuance or operation in Georgia as a regulated "stablecoin."
• The focus of the LoVA and NBG regulations will be on stablecoins with robust, identifiable, and auditable reserve assets, thereby mitigating risks associated with highly volatile or collapsing algorithmic models.

Specific Legislation:

• Law of Georgia on Virtual Assets (LoVA), by defining ARTs and EMTs based on asset backing, implicitly excludes unbacked algorithmic stablecoins from these regulated categories, placing them in a regulatory gray area or making them unfeasible for licensed operation.

6. CBDC Interaction:

The National Bank of Georgia has been actively exploring a Central Bank Digital Currency (CBDC), known as the Digital Lari.

• Project Status: In September 2023, the NBG announced the launch of a pilot project for the Digital Lari with private sector participants.
• Nature: The Digital Lari, if fully implemented, would be a direct liability of the NBG, representing a digital form of the national currency. It would be fundamentally different from private stablecoins, which are liabilities of private issuers.
• Interaction:
  • Coexistence: A Digital Lari could coexist with regulated private stablecoins, offering an official, risk-free digital payment option alongside private sector innovations.
  • Competition: It might also compete with stablecoins, especially those referencing the Georgian Lari (EMTs), by offering a more secure and trusted alternative.
  • Regulatory Separation: The legal framework for a Digital Lari would likely be established under the NBG's powers related to currency issuance, separate from the LoVA which governs private virtual assets.

Specific Legislation/References:

• National Bank of Georgia Press Release on Digital Lari Pilot: NBG Launches Digital Lari Pilot Project (September 2023)

Conclusion:

Georgia has taken a proactive and comprehensive approach to stablecoin regulation, largely mirroring the robust framework established by the EU's MiCA regulation through its Law on Virtual Assets. This framework emphasizes asset-backed stablecoins (ARTs and EMTs), mandates stringent licensing and reserve requirements, and ensures consumer protection through clear redemption rights. Unbacked algorithmic stablecoins are effectively excluded from this regulated environment. The exploration of a Digital Lari by the NBG indicates a multi-faceted strategy for digital currency in the country.

Disclaimer: This information is for general informational purposes only and does not constitute legal advice. For specific legal guidance, consult with a qualified legal professional in Georgia.