The Basel Committee for Banking Supervision (BCBS), the global standard-setter for banks has issued a consultative document on Thursday, proposing 11 standards for stablecoins, a type of cryptocurrency that is supposed to maintain a stable value by being backed by a specific asset such as the dollar, euro or gold.
The BCBS wants to impose stricter criteria for allowing stablecoins to be treated as less risky than unbacked cryptocurrencies such as bitcoin, which are subject to the maximum possible risk weight of 1,250%.
Banks must hold enough capital to cover their exposure to these volatile digital assets. Banks can allocate no more than 2% of their core capital to these riskier assets. The BCBS said it will not change these standards, which were announced in June this year. The consultation runs until March 28, 2023.
Group 1b Criteria For Stablecoins
However, stablecoins that have “effective stabilization mechanisms” can qualify for “preferential Group 1b regulatory treatment”, which means that they are subject to lower capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework.
But to qualify for this preferential treatment, stablecoins have to meet a range of criteria, including being “redeemable at all times.” The BCBS said that:
only stablecoins issued by supervised and regulated entities that have robust redemption rights and governance are eligible for inclusion.
The BCBS also reported the reserve assets that are used to back stablecoins can pose various risks that can affect the ability of the stablecoin issuer to meet holders’ expectations of redemption on demand. Therefore, the reserve assets must meet high quality, maturity, and volatility standards.
BCBS Guidelines For Stablecoin Reserve Assets
According to the BCBS, the reserve assets used to cover redemptions should be “comprised largely of assets with short-term maturities.” This would reduce the liquidity risk because the stablecoin issuer cannot sell the reserve assets quickly enough to meet redemption requests.
The reserve assets should also have high credit quality, meaning they have a low probability of default or loss. This would reduce the credit risk, which is the risk that the borrowers of the reserve assets fail to repay their obligations.
Moreover, the reserve assets should have low volatility, meaning their prices remain relatively stable and less affected by market stress. This would reduce the market risk, which is the risk that the value of the reserve assets fluctuates due to changes in market conditions.
The BCBS said these standards are intended to address the potential risks of stablecoins to the financial stability and the banking system. The BCBS also said that it will continue monitoring the developments and innovations in the crypto-asset market and revise its standards as needed.
The BCBS is not the only regulator concerned about the risks and challenges of stablecoins. The Financial Stability Board (FSB), the international body that coordinates the work of national financial authorities, also issued a report in October this year, recommending 10 high-level recommendations for the regulation, supervision, and oversight of stablecoins.
The FSB said that stablecoins have the potential to enhance the efficiency and inclusiveness of the global payment system, but they also pose significant risks to financial stability, consumer protection, market integrity, data privacy, monetary policy, and cross-border cooperation.
The FSB said that authorities should ensure that stablecoins are subject to comprehensive regulation and oversight, have effective risk management frameworks, comply with relevant standards and rules, and cooperate with each other to address cross-border issues.
The FSB also said it will continue working with the BCBS and other standard-setting bodies to develop international standards and guidance for stablecoins and other crypto-assets. The FSB also said it would monitor its members and other relevant bodies’ implementation and assessment of its recommendations.
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