Global Regulators Call for Interoperable Stablecoins, CBDCs

The Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) published on Wednesday (July 13) their guidance on the application of financial market infrastructure rules to stablecoins, including the entities that provide stablecoins.

The main message is that when a stablecoin reaches a point to be considered of significant importance, it must comply with the same safeguard rules as any other traditional form of payments. As the regulators noted, the guidance is a step forward in applying “same risk, same regulation” to stablecoins, and it extends the international standards for payments, clearing and settlement systems to cover the major stablecoins. In other words, stablecoins should be more centralized, supervised and controlled.

The BIS recognizes that stablecoin uses are evolving over time and are becoming more important. The most frequent use cases for stablecoins, the BIS noted, include acting as a bridge between traditional fiat currencies and digital assets; serving as collateral in crypto asset derivative transactions; and facilitating trading, lending or borrowing and acting as collateral in DeFi. And these are just a few use cases, but the use of stablecoins as settlement assets can play an important role in the future.

After establishing that stablecoins can be a means of payment and they can also pose a risk if they are left unregulated. BIS and IOSCO provide guidance to other national regulators in two areas: first, on how to identify a stablecoin that is of significant importance, and second, how to apply governance and risk management principles to those stablecoins.

See also: BIS Recommends Built-In Regulatory Framework for DeFi Blockchains

For the first part, the regulators take the view that for a payment system (including stablecoins) to be systematically important, “it has to have the potential to trigger or transmit systemic disruptions.”  The BIS included some other considerations for the analysis, for example, the size of the stablecoin, whether it is used as a principal payment or settlement mechanism, the risk profile of the stablecoin, type of stablecoin users, transactions or how interconnected it is with other parts of the economy.

For the second part, how to apply governance and risk management principles, the recommendation is to make sure that stablecoins are as centralized and controllable as possible. For instance, the BIS recommends that the stablecoin’s ownership structure and operation should allow for clear and direct lines of responsibility and accountability. Even if the stablecoins are owned and operated by one or more legal entities, ultimately, there should be a real person behind them responsible. Governance rules should allow for timely human intervention as and when needed. A significant stablecoin should also be reviewed regularly, the BIS suggested, to make sure that any material risk is adequately managed.

Another interesting point is that for the BIS, major stablecoins should have little or no credit or liquidity risk. To determine whether a stablecoin complies with this requirement, the digital assets should have reserve assets backing them and these reserves should be sufficient to support and stabilize the value of the outstanding stock of issued stablecoins.

The report also included other recommendations to impose controls over stablecoins and the companies and individuals controlling them.

Interestingly, the BIS suggested that to address all the challenges associated with stablecoins, not only systemic risks, but data privacy, consumer protection or anti-money laundering concerns, these recommendations to regulate stablecoins should be complemented by other efforts such as improving existing payment infrastructure or to develop central bank digital currencies (CBDCs).

The BIS, as well as other central banks, are increasingly changing their tones to praise the benefits of CBDCs, while proposing stricter regulation of private stablecoins. The two digital assets share similarities like the technology they use (blockchain), the use cases (payments, settlements, bridge between crypto assets and fiat money) and potential risks (privacy, AML). Additionally, both stablecoins and CBDCs can improve cross-border payments. But regulators seem to be pushing only the public alternative, CBDCs.

In this regard, the BIS published a report on Monday (July 11) about how countries can develop a CBDC that is interoperable with other digital assets from other countries (whether CBDCs or non-CBDCs) and how CBDCs could improve cross-border payments.

The BIS and other regulators are proposing regulations and recommendations that to a certain extent are bringing the two digital assets, private stablecoins and CBDCs, closer. In this sense, regulators are recommending stablecoins to be more centralized and accountable, as a CBDC and CBDCs to be more interoperable and accessible to people, as a stablecoin.

Read More: The Case for Stablecoins: A Better, Safer, More Innovative Payments Solution Than Bitcoin

For all PYMNTS TechREG, Cryptocurrency and EMEA coverage, subscribe to the daily newsletters.