Global Cooperation on Stablecoins Critically Important, Bis Says

BIS Calls for Global Cooperation to Manage Stablecoin Risks and Regulation

By Leika Kihara

Global Concerns and Regulatory Challenges Surrounding Stablecoins

TOKYO, April 20 (Reuters) - The head of the Bank for International Settlements has made a renewed call for international cooperation on how stablecoins are used, describing it as vital to prevent severe market fragmentation.

BIS Warnings on Stablecoin Risks

The central bankers’ central bank, as the BIS is known, has long raised concerns about stablecoins - a type of cryptocurrency usually pegged 1:1 to the U.S. dollar.

Potential Threats to Financial Stability

Speaking in Japan, BIS General Manager Pablo Hernandez de Cos said the potential of stablecoins to undermine monetary and fiscal policy, cause financial market stress and hamper the fight against illicit financing, meant global coordination was of "critical importance".

Risks of Regulatory Fragmentation

Without it, "divergent regulatory frameworks for stablecoins across jurisdictions could lead to severe market fragmentation or enable harmful regulatory arbitrage," de Cos warned, referring to when firms seek out the least onerous ​rules.

International Regulatory Landscape

The comments come as the United States and other leading economies race to build regulatory frameworks for stablecoins and catch up with the likes of Abu Dhabi and Singapore that already have them in place.

Slow Progress on Global Standards

Bank of England Governor Andrew Bailey, who chairs global financial watchdog the Financial Stability Board, also warned last week that progress on ​international standards for stablecoins had slowed over the last year.

Market Risks and Stablecoin Features

De Cos reiterated that "runs" on stablecoins could trigger market stress although that risk could be "much reduced" if stablecoin issuers had access to deposit insurance-type arrangements or central bank lending facilities.

Stablecoins Compared to Securities

Tether and Circle - the issuers of the world's two largest stablecoins which account for roughly 85% of the $315 billion in circulation globally - also exhibit features that make them resemble "securities rather than money," he said, in particular, imposing "redemption frictions" that lead to frequent deviations from par.

"In this respect, they currently operate more like exchange-traded funds than like money," he added.

Debate Over Interest Payments on Stablecoins

He also gave his view on the key current debate around whether stablecoins should be allowed to pay interest in the same way that traditional bank accounts do.

Impact of Interest Prohibitions

"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 BIS head said.

"And if prohibitions on paying interest on stablecoins can be enforced."

Reporting Credits

(Reporting by Leika Kihara; Additional reporting by Phoebe Sears; Writing by Marc Jones; Editing by Lincoln Feast.)