The Bank for International Settlements (BIS) has emphasized the need for a more stringent regulatory framework for stablecoins due to their increasing integration with the traditional financial system. In a bulletin released on July 11, 2023, the BIS identified potential risks to financial integrity and stability posed by the rapid growth of stablecoins.
The bulletin titled “Stablecoin Growth — Policy Challenges and Approaches” highlighted that the market capitalization of stablecoins surged from $125 billion to $255 billion in under two years. Notably, two issuers dominate this market, accounting for approximately 90% of the total capitalization, while a staggering 99% of active stablecoins are denominated in U.S. dollars.
The BIS raised concerns regarding the use of foreign currency-denominated stablecoins, stating that they could undermine monetary sovereignty and challenge the effectiveness of current foreign exchange regulations. The report noted that the cross-border use of these digital currencies is expanding, which could allow non-U.S. residents to access dollar-denominated claims. This, in turn, may weaken the impact of domestic monetary policies in various countries.
“Broad-based stablecoin adoption could provide seamless access to dollar-denominated claims for non-U.S. residents, potentially weakening the effectiveness of domestic monetary policy,” the bulletin stated. It also warned that this trend might erode the efficacy of foreign exchange regulations or capital controls, as evidenced by similar patterns observed with bitcoin and other cryptocurrencies.
In addressing the regulatory response necessary for stablecoins, the BIS pointed out that current frameworks often adhere to geographical boundaries. Given that stablecoin transactions span the globe, the BIS advocates for a tailored approach that leverages blockchain information to combat illicit activities such as money laundering.
The bulletin underscored the importance of international collaboration and a technology-neutral stance in regulatory efforts. “Bespoke frameworks need not imply a reduction in regulatory stringency,” it stated. “On the contrary, since many entities within the stablecoin ecosystem operate without established safeguards, a more restrictive regime may be necessary than in traditional finance, where such safeguards are in place.”
Previously, in June, the BIS had indicated that stablecoins “fall short” as a reliable form of money and pose risks to financial stability and monetary sovereignty without adequate regulation. The organization proposed that a tokenized unified ledger, developed by central banks and public authorities, could enhance financial efficiencies while addressing the shortcomings associated with stablecoins.
As the landscape of digital currencies continues to evolve, the BIS’s call for more rigorous oversight reflects a growing recognition of the complexities and potential hazards linked to the rise of stablecoins in the global financial ecosystem.
