BIS Raises Concerns Over Stablecoins Amid Regulatory Developments
The Bank for International Settlements (BIS), often referred to as the "central bank for central banks," has highlighted significant risks associated with stablecoins, warning that inadequate regulation may jeopardise financial stability and undermine monetary sovereignty. This caution comes at a time when stablecoins are increasingly popular and regulatory frameworks are evolving, exemplified by the European Union’s upcoming Market in Crypto-Assets (MiCA) regulations and the recently passed GENIUS bill in the United States.
In a report released on 24 June, the BIS asserted that stablecoins do not meet the criteria for "sound money." Without appropriate regulatory oversight, the report argued, they pose a threat to the financial system. The BIS indicated that while stablecoins possess the potential to enhance certain aspects of the financial ecosystem—particularly in cross-border payments and the securities market—they ultimately fail to fulfil essential monetary functions.
The BIS critique emphasised the limitations of stablecoins in providing the necessary guarantees that come with central-bank-issued currencies. They highlighted that stablecoins may trade at varying rates, similar to 19th-century private banknotes, which could jeopardise their reliability and acceptance as a consistent monetary form.
In a pointed commentary, Hyun Song Shin, Economic Adviser to the BIS, remarked that stablecoins lack guaranteed settlement features that are characteristic of fiat currencies managed by central banks. He described them as trading at variable rates, thereby eroding the concept of money being acceptable at face value.
The BIS recognised a potential subsidiary role for stablecoins within the financial system, provided they are correctly regulated. However, the report concluded that their overall future remains uncertain, as they do not deliver essential attributes of sound money—specifically, the acceptance for payment at par, timely fulfilment of obligations, and protection against financial crime.
Tether’s Non-Compliance with EU Regulations
In light of these findings, the BIS raised specific concerns about the regulatory compliance of leading stablecoin providers. Tether, the issuer of the largest stablecoin, USDT, has notably resisted adhering to the MiCA regulations, which stipulate that stablecoin issuers must be licensed in an EU member state and maintain 60 per cent of their assets in European banks. This non-compliance has led to the decision by major cryptocurrency exchanges, including Binance and Kraken, to remove USDT trading pairs for customers based in Europe.
This pushback against regulatory frameworks has had ramifications for market players. Following the BIS report, Circle, which issues the second-largest stablecoin, USDC, observed a 15.49 per cent drop in its share price. Notably, USDC is compliant with the MiCA regulations, which may position it favourably in a landscape increasingly focused on regulatory adherence.
The broader implications of these developments suggest that while the stablecoin market experienced rapid growth, the ongoing scrutiny and regulatory measures could shape its trajectory. As the conversation around stablecoins evolves, proponents and critics alike will be watching for clarity on future regulations and the potential impact on market stability.
In summary, the ongoing debate regarding the role of stablecoins reflects larger questions about innovation and regulation within the current financial landscape. The BIS’s firm stance highlights the need for effective governance frameworks to ensure that new financial instruments contribute positively to the stability and integrity of the global financial system.
