Stablecoins should be subject to the same standards as the clearing and settlement sectors, according to leading international regulators.
A report from The Bank for International Settlements and The International Organization of Securities Commissions noted that the most common use cases for stablecoins — cryptoassets pegged to fiat currencies — was to bridge digital assets and commercial money, so stablecoins fit the definition of “systemically important financial market infrastructure”.
“Recent developments in the cryptoasset market have again brought urgency for authorities to address the potential risks posed by cryptoassets, including stablecoins more broadly,” said Sir Jon Cunliffe, chair of the committee on payments and market infrastructures at the BIS and a deputy governor at the Bank of England.
Examples of other systematically important infrastructure include payments networks like Visa and MasterCard, as well as clearing houses.
The decision to regulate stablecoins as a payment, clearing and settlement method is an extension of the “same risk, same regulation” approach watchdogs are taking with the wider crypto space, and will bring stablecoins more in line with traditional finance, the two the standards-setting bodies said.
Under the guidance issued by the BIS and IOSCO, stablecoins deemed systemically important will need to have little credit or liquidity risk, meaning tokens can be easily exchanged with fiat currencies in both normal times and in times of market stress. The stablecoin provider would also need to have appropriate risk management tools in place and sufficient reserve assets backing the coin.
Ashley Alder, chair of IOSCO and chief executive of the Hong Kong Securities and Futures Commission said: “Our risk management, governance and transparency standards for existing financial market infrastructures are stringent. We expect the same level of robustness and strength in these aspects in systemically important stablecoin arrangements.”
Stablecoins are under increasing scrutiny as the implosion of terraUSD back in May precipitated a crypto crash that continues to hammer the sector. The firm overseeing terraUSD, Luna Foundation Guard, had a $3bn rainy day fund, but this was not enough to save the token.
Cunliffe said: “The recent market disruptions, while costly for many, were not systemic events. But they underline the speed with which confidence can be eroded and how volatile cryptoassets can be.
“Such events could become systemic in the future, especially given the strong growth in these markets and the increasing linkages between cryptoassets and with traditional finance.”
In June, the BIS said deep structural problems in crypto prevented it from becoming a sound monetary system alternative. It was particularly dismissive of stablecoins, saying they needed to “piggyback on the credibility” of central banks.
The EU’s newly agreed upon regulation for crypto, Markets in Crypto Asset,s has also called on stablecoin providers to have capital reserve requirements, similar to those imposed on banks.
To contact the author of this story with feedback or news, email Jeremy Chan