International stablecoin regulations lose momentum, prompting the BIS to call for unified action to prevent market fragmentation
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To address potential risks such as mass withdrawals, regulators are considering protective measures like capping yields and providing issuers with access to central bank liquidity facilities.
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Key Points:
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- Advancement of global stablecoin frameworks has decelerated, leading the BIS and the Financial Stability Board to caution that inconsistent regulations may heighten systemic risks and facilitate regulatory arbitrage.
- Regulators are exploring safeguards against sudden outflows, including restrictions on interest offerings and granting issuers access to central bank lending or deposit insurance mechanisms.
- The United States is progressing with the Digital Asset Market Clarity Act, where a potential agreement on stablecoin yields may pave the way for legislative markup.
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Efforts to establish worldwide stablecoin standards have stagnated over the past twelve months, sparking apprehension among central bankers that regulatory loopholes could fracture markets and increase vulnerability.
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Andrew Bailey, Governor of the Bank of England and chair of the Financial Stability Board, noted that international rulemaking has stalled, as reported by Reuters last week. This development raises concerns for Bank for International Settlements (BIS) General Manager Pablo Hernández de Cos, who spoke in Japan on Monday.
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De Cos emphasized the necessity of global coordination to prevent a disjointed regulatory landscape that firms might exploit, according to Reuters. In the absence of harmonized international standards, businesses may relocate to regions with less stringent oversight, a phenomenon termed regulatory arbitrage.
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This caution arises as major economies implement their own frameworks, frequently at varying paces and with distinct methodologies.
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The stablecoin market has grown significantly in recent years, now totaling $320 billion per DeFiLlama data. Tether’s USDT and Circle Internet’s (CRCL) USDC dominate this valuation. De Cos observed that their structure may function more like securities than currency, noting that redemption delays can cause prices to deviate from their target $1 peg.
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He also highlighted that rapid withdrawals could trigger market-wide disruptions. Risk-reduction proposals encompass restricting interest payments on stablecoins and enabling issuers to utilize central bank lending facilities or deposit-insurance-like protections.
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Regulators contend these steps could enhance sector stability while maintaining its function in digital payments.
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In the United States, legislators are advancing the Digital Asset Market Clarity Act, which would establish federal guidelines for digital asset markets.
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The legislation passed the House last year and is now under Senate review, with Banking Committee Chairman Tim Scott and Agriculture Committee Chairman John Boozman spearheading efforts. Senators Thom Tillis and Angela Alsobrooks have crafted a compromise regarding stablecoin yields that may facilitate markup, while Senator Cynthia Lummis, who leads the Banking Committee’s digital assets subcommittee, indicated a hearing might occur in late April.
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Agreement still depends on settling several unresolved issues, including decentralized finance (DeFi) regulation and ethical guidelines.