Enhancing Stablecoin Oversight: Global Banking Regulator Advocates Stricter Criteria for Granting Preferential Risk Treatment

The Basel Committee for Banking Supervision is advocating for a stringent regulatory framework to redefine the risk profile of stablecoins, distinguishing them from unbacked cryptocurrencies like Bitcoin.

The committee is focused on enhancing criteria governing stablecoins, stressing the importance of specific attributes in their reserve assets. These attributes include short-term maturity, high credit quality, and low volatility, crucial for meeting redemption expectations.

Outlined in a consultative document released on Thursday, the proposal introduces 11 standards for stablecoins. To be eligible for Group 1b consideration, stablecoins must adhere to criteria such as short-term maturity, high credit quality, and low volatility. The consultation period for this proposal extends until March 28.

The document raises concerns about risks associated with reserve assets used to cover redemptions, casting doubt on the ability of stablecoin issuers to meet holders' expectations of redemption on demand.

The Basel Committee aims to impose more stringent criteria for treating stablecoins as less risky compared to high-risk assets like Bitcoin. While maintaining existing rigorous standards for assets like Bitcoin, which means banks have to issue capital to match their exposure.  the committee acknowledges stablecoins with "effective stabilization mechanisms," qualifying them for preferential Group 1b regulatory treatment.

For eligibility, stablecoins must be "redeemable at all times," restricting inclusion to those issued by supervised and regulated entities with robust redemption rights and governancethe, BCBS has said. 

Stablecoins failing to meet these conditions fall into the Group 2 category, subject to a new highly conservative capital treatment.

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To meet Group 1b criteria, stablecoin reserves must predominantly consist of assets with short-term maturities, mitigating credit risk. Reserves should be invested in assets with high credit quality and low volatility, minimizing adverse price effects during stressed market conditions.

Additionally, reserves must be shielded from the bankruptcy of any party involved in stablecoin operations, ensuring other creditors have no claims on the reserve assets, except where they are also stablecoin holders.

This regulatory push coincides with efforts by organizations to evaluate stablecoin quality, exemplified by S&P Global's stability assessment. This assessment, which rates stablecoins on a scale from 1 (strong) to 5 (weak), scrutinizes their ability to maintain pegs to underlying assets.

The increasing popularity of stablecoins highlights their role as a pivotal bridge between digital and real-world assets within financial markets.

Read More: Forge Selects Flowdesk as Market Maker for Euro-Based Stablecoin