To avoid significant market fragmentation, the head of the Bank for International Settlements has reiterated the need for international cooperation on the use of stablecoins.
Stablecoins, a kind of cryptocurrency that is often linked 1:1 to the US dollar, have long been a source of concern for the central bankers’ central bank, or BIS.
Speaking in Japan, Pablo Hernandez de Cos, general manager of BIS, stated that international cooperation was of “critical importance” due to the possibility of stablecoins undermining monetary and fiscal policy, causing financial market stress, and impeding the battle against illicit finance.
Without it, “divergent regulatory frameworks for stablecoins across jurisdictions could lead to severe market fragmentation or enable harmful regulatory arbitrage.” This refers to the practice of businesses looking for the least restrictive regulations.
The remarks are made as the US and other major economies rush to establish stablecoin regulations to catch up to nations like Singapore and Abu Dhabi that already have such.
Last week, Andrew Bailey, the governor of the Bank of England and chair of the Financial Stability Board, a global financial watchdog, stated that the last year has seen a slowdown in the development of international standards for stablecoins.
De Cos reaffirmed that “runs” on stablecoins might cause market stress, but that risk could be “much reduced” if stablecoin issuers had access to central bank loan facilities or arrangements similar to deposit insurance.
Increased use of stablecoins may also hasten the “dollarization” of economies in developing nations, facilitate the circumvention of capital controls, and “thus allow for both greater inflows (surges) in good times and outflows (capital flight) in times of stress,” according to de Cos.
MONEY OR SECURITIES?
He claimed that Tether and Circle, the companies that issue the two biggest stablecoins in the world, which make up about 85% of the $315 billion in circulation worldwide, also have characteristics that make them resemble “securities rather than money,” particularly imposing “redemption frictions” that cause frequent deviations from par.
They currently function more like exchange-traded funds than like money in this regard,” he continued.
Tether did not immediately reply to a request for comment, while Circle declined to comment.
According to commentators, issuers of stablecoins would be subject to stricter disclosure and compliance requirements if regulators classified them as securities.
Alternatively, the cryptocurrency industry has advocated for their regulation as money, which might lead to an increase in their use for everyday payments.
The Securities and Exchange Commission recently declared that it will not treat stablecoins as securities under its Genius Act in the United States, where Donald Trump has been supporting cryptocurrency assets.
De Cos also shared his thoughts on the ongoing discussion on whether stablecoins ought to be permitted to pay interest in the same manner as conventional bank accounts.
“Shifts from bank deposits to stablecoins may also be less pronounced if stablecoin holdings remain unremunerated and the opportunity cost of holding them is high, such as during periods of high interest rates,” the head of BIS noted, and it is possible to enforce bans on paying interest on stablecoins.
