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- A report published by the Bank for International Settlements and IOSCO envisions a regulatory mechanism for stablecoins.
- The report argues that stablecoins should be placed within the scope of current global payment standards.
- The report also mentioned that there is a risk of using blockchain and smart contracts for stablecoins.
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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 sets the rules for stablecoins
A new report from the Bank for International Settlements argues that stablecoins should be brought under the jurisdiction of current global payment standards.
The report, titled “Principles of Financial Market Infrastructure for Stablecoin Arrangements,” was published in collaboration with the International Organization of Securities Commissions (IOSCO), and explains how standardization of rules for stablecoins is of “methodological importance.”
They detail the regulatory issues that may arise from the increased use of stablecoins in the global financial infrastructure. Last month, Benoit Coeuré, Head of Innovation at the Bank for International Settlements, issued a warning to central banks, noting that “stablecoins and DeFi will challenge bank models.”
A stablecoin is a type of cryptocurrency linked to another asset. They often track the rates of fiat currencies such as the US dollar. The stablecoins can be backed by fiat money or crypto assets; Those backed by fiat tend to be issued by a central party, but many decentralized stablecoins have grown in the market over the past few years.
The most commonly used US dollar stablecoins are USD Tether (USDT) and USD Coin (USDC). According to CoinGecko, they have a combined market capitalization of around $104 billion.
While stablecoins initially proved popular on crypto exchanges and in DeFi, they have slowly crept into the world of traditional finance as the crypto space has grown. Visa and Mastercard, two of the world’s largest payment processing networks, have taken steps to support USDC payments this year.
While stablecoins are a cornerstone of today’s cryptocurrency ecosystem, global regulators have voiced concerns, commenting that stablecoins pose risks to financial stability. One of the common arguments made is 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 the operational risks of issuing, transferring and validating transactions across various market participants.
For example, the report says that all stablecoin projects should be operated by more identifiable and responsible legal entities. In addition, the report argued against the use of blockchains for stablecoins. It stated that distributed ledger-based smart contracts may create an “imbalance between legal (settlement) finality and technical settlement” and that managing a stablecoin implemented only through smart contracts is “potentially inflexible in the event of a changing environment.”
The proposals in the BIS report have been published for consultation and are expected to be completed early next year. The report arrived with several countries making moves to introduce central bank digital currencies (CBDCs). At the same time, regulators, central bankers, and elected officials made clear attempts to clamp down on stablecoin issuers. Just a few days ago, the USDC issuing department revealed that the US Securities and Exchange Commission had filed a subpoena in July. The investigation is believed to be ongoing.
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