A Regulatory Wake Up Call for Global Stablecoin Arrangements
The world of digital finance never stands still, and the latest development to demand attention is global stablecoin arrangements (GSAs). Hailed as bridges between the conventional and digital world of finance, their escalating popularity has caught the eye of international financial regulators. Specifically, the Bank for International Settlements (BIS) recently issued a raft of regulatory proposals whose waves are set to ripple through the stablecoin landscape.
Deciphering the BIS Regulatory Recommendations
The BIS has put forth an array of comprehensive, six-point recommendations to monitor GSAs more effectively. Acknowledging the convenience GSAs offer to consumers, BIS stresses they should only be allowed to operate if they comply with “appropriate prudential standards”. Such standards include maintaining capital adequacy, managing and monitoring market and credit risks, and meticulously following liquidity risk standards and operational resilience requirements.
The second recommendation calls for GSAs and their operations to align with the “same risk-related standards” that apply to traditional payment, clearing, and settlement facilities. The importance of GSAs identifying, monitoring and managing their risks under this parameter could significantly improve the payment infrastructures across the world.
Given the technological shift GSAs symbolize, it’s unsurprising that the BIS’s third recommendation touches upon technology governance. It suggests that GSAs must have robust, comprehensive governance frameworks encompassing IT systems and data privacy.
Recommendations for Financial Stability and User Protection
Rightfully considering financial stability, the BIS’s fourth recommendation stresses maintaining “capital buffers of a size and composition commensurate with the nature and risk of their operations”. This proposition aims to protect GSAs from financial instability while ensuring users stay safeguarded.
In the fifth recommendation, the BIS proposes that GSAs be required to implement effective recovery and resolution policies to protect themselves from a potential collapse. And given the global nature of GSAs, the BIS urges regulators to have clearly established coordination mechanisms — which leads us to the final recommendation.
The sixth and final point emphasizes that GSAs should operate under a comprehensive, cross-border legal framework. Here, the BIS underlines the need for “clear regulatory, supervisory, and oversight powers and frameworks”. In a nutshell, they’re proposing that each GSA have a single, designated regulator in place.
Moving Forward with BIS Recommendations
With 40% of central banks likely to launch central bank digital currencies (CBDCs) within the next decade, the BIS’s recommendations are indeed timely. However, GSAs will face several challenges in their path towards such regulatory compliance, including adjusting business operations models, technology and risk management frameworks. The Ongoing dialogue between GSAs and global regulatory institutions will be key to a smoother transition in this changing financial landscape.
