BIS: Stablecoins Offer Promise, but Need Consistent Regulation

BIS: Stablecoins Offer Promise, but Need Consistent Regulation

by April 11, 2024

The Bank for International Settlements (BIS) has released a report, “Stablecoins: Regulatory Responses to Their Promise of Stability,” analysing the regulatory environments for stablecoins across seven distinct jurisdictions.

Authored by Juan Carlos Crisanto, Johannes Ehrentraud, and Denise Garcia Ocampo, this report underscores the increasing prominence of stablecoins in the financial landscape, pointing out their potential to mirror the value of fiat currencies.

However, it also acknowledges the challenges in maintaining a stable value, a concern that regulatory bodies around the globe are diligently working to address.

The document meticulously compares the regulatory frameworks from 11 authorities within these jurisdictions, highlighting the proactive measures being taken to mitigate the various risks associated with the issuance of stablecoins, especially those tethered to a single fiat currency.

These efforts cover a comprehensive range of regulatory concerns, including but not limited to licensing requirements, reserve asset management, redemption rights, capital adequacy, consumer protection, and compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) guidelines.

Crucially, the BIS’s analysis reveals that while stablecoins offer a promise of stability, maintaining value parity with a referenced asset and ensuring redemption upon request remain challenging.

This nuanced perspective identifies stablecoins pegged to a single currency and backed by traditional financial assets as having significant potential for widespread payment use.

Nevertheless, the report also points to significant risks, such as instances of stablecoins de-pegging and concerns over their use in illicit activities and the potential threat to financial stability.

A notable aspect of the report is the identification of common regulatory requirements across jurisdictions, including the establishment of two types of authorisation regimes for stablecoin issuers and the emphasis on maintaining reserves in segregated accounts.

However, the report also flags concerns about the lack of consistency and coordination in the oversight of stablecoins among regulators, citing differences in terminologies and regulatory treatments across jurisdictions.

The executive summary concludes with a call for increased international cooperation to prevent regulatory fragmentation and ensure a harmonised approach to the oversight of stablecoins.

As the adoption of these digital assets grows, the BIS stresses the importance of a regulatory framework that balances innovation with risk mitigation and highlights the potential for stablecoins to interoperate with other digital currencies, such as Central Bank Digital Currencies (CBDCs) and tokenised deposits.

This approach is deemed critical for facilitating an integrated global financial system and shaping an effective and consistent regulatory environment for stablecoins.