BIS Says Stablecoins Need Traditional Payments Rules

A new report from the Bank for International Settlements suggests that stablecoins should be subject to the same rules as traditional payment systems.

IOSCO-BIS Prescribe Stablecoin Rules

A new report from the Bank for International Settlements argues that stablecoins should be put under the purview of existing global payment standards.

The report titled “Principles for Financial Market Infrastructures To Stablecoin Arrangements” was published in collaboration with the International Organization of Securities Commissions (IOSCO), and outlines how standardizing rules for stablecoins is of “systemic importance.”

It details the regulatory issues that may arise from the growing use of stablecoins in global financial infrastructure. Last month, Benoit Coeuré, the head of the BIS’ innovation hub, issued a warning to central banks, stating that “stablecoins and DeFi will challenge banks’ models.”

Stablecoins are a type of cryptocurrency that is pegged to another asset. They most frequently track the price of fiat currencies such as the U.S. dollar. Stablecoins can be backed by fiat money or crypto assets; those backed by fiat tend to be issued by a centralized party, but several decentralized stablecoins have grown in the market over the last few years.

The two most used U.S.-dollar pegged stablecoins are USD Tether (USDT) and USD Coin (USDC). According to CoinGecko, they have a combined market capitalization of about $104 billion.

While stablecoins initially proved popular on cryptocurrency exchanges and in DeFi, they have slowly infiltrated the traditional finance world as the crypto space has grown. Visa and Mastercard, two of the world’s largest payments processing networks, have both taken steps to support USDC payments this year.

While stablecoins are considered a cornerstone of the cryptocurrency ecosystem today, global regulators have expressed concerns, commenting that stablecoins pose risks to financial stability. One popular argument presented points out that stablecoins are not issued by central or commercial banks.

The BIS report aims to provide considerations to help relevant regulators establish rules for operators of a “stablecoin arrangement.” The standards will govern and manage operational risks of the issuance, transfer, and transaction validation of stablecoins across various market participants.

For example, the report says that all stablecoin projects should be operated by more identifiable and responsible legal entities. Additionally, the report argued against using blockchains for stablecoins. It stated that smart contracts based on a distributed ledger may create “misalignment between legal (settlement) finality and technical settlement” and that governance of a stablecoin implemented solely through smart contracts is “likely to be inflexible in case of a changing environment.”

The proposals in the BIS report have been published for consultation and are expected to be finalized early next year. The report lands as several countries are making moves to roll out central bank digital currencies (CBDCs). Simultaneously, regulators, central bankers, and elected officials have made clear attempts to clamp down on stablecoin issuers. Just a few days ago, USDC’s issuer Circle revealed that the SEC had served it a subpoena in July. The investigation is thought to be ongoing.