Financial Stability Study Calls for Consistent Regulatory Response to Stablecoins

Countries need to make their regulatory frameworks for stablecoins consistent with one another, the Financial Stability Institute (FSI) warned in a report published Tuesday.

The FSI, jointly created by the Bank for International Settlements and the Basel Committee on Banking Supervision, is tasked with assisting regulators worldwide in strengthening their financial systems. The institute's report on policy implementation insights for stablecoins – which refers to cryptocurrencies whose value is pegged to other assets such as sovereign currencies – warns of the dangers of fragmentation in supervision across the world.

"Stablecoins may still be unregulated or lightly regulated in other jurisdictions," said the report, authored by FSI Deputy Chair Juan Carlos Crisanto and Senior Advisors Johannes Ehrentraud and Denise Garcia Ocampo.

The authors argued that while many regulatory approaches have similarities when it comes to key requirements, the differences are largely driven by the variety of stablecoin design features and perceived risks. The report warned that this fragmentation in approaches to supervision could pose challenges to an integrated financial system and threaten financial stability.

Nations around the world have been exploring how to regulate stablecoins for several years. The U.K., for instance, passed legislation to recognize stablecoins as a means of payment in 2023, while the European Union passed the landmark Markets in Crypto Assets regulation (MiCA) to supervise issuers and service providers handling stablecoins. Japan too has started regulating stablecoins, while the U.S. is considering a stablecoin bill.

The FSI report says jurisdictions have varying definitions and categorizations for stablecoins that may pose a risk to financial stability. There are also discrepancies in requirements for the disclosure of reserve assets kept by stablecoin issuers to maintain the crypto's value against its reference currency.

"A consistent regulatory framework, as well as its global implementation, is essential to address stablecoins’ risks, prevent regulatory arbitrage and ensure a level playing field in the digital asset ecosystem," the FSI report said.

Ensuring the interoperability of stablecoins with central bank digital currencies (CBDC) and other digital assets would also be key to promoting an integrated financial system, the report added.

Global organizations such as the International Monetary Fund (IMF) and Financial Stability Board (FSB) have issued or are working on universal norms for stablecoins.

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