Bank for International Settlements issues guidance for stablecoin arrangements in new report

By: Daniela Kirova
Daniela Kirova
Daniela was born in Bulgaria, grew up in Chicago, and then moved to Michigan to attend the University of… read more.
on Oct 6, 2021
  • Report includes directions on application of Principles for Financial Market Infrastructures to stablecoins
  • Financial watchdogs across the globe are showing growing interest in stablecoins and their regulation
  • BIS’ report provides guidance based on risk management, settlement, and more

The Bank for International Settlements (BIS) stated stablecoin payment systems must meet international standards for settlement, clearance, and payment in a new report published today, Coindesk reported.

The report was issued together with the International Organization of Securities Commissions (IOSCO) and includes directions on application of the PFMI (Principles for Financial Market Infrastructures) to stablecoin transactions.

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The BIS and IOSCO have made the report publicly available and invited stakeholders to ask questions and make general comments on the document.

Stablecoin regulation is picking up worldwide

Financial watchdogs across the globe are showing growing interest in stablecoins and their regulation. China’s central bank has expressed concern that privately issued coins can damage financial systems. The US government is working on a framework for stablecoin issuers to uphold.

According to ECB head Christine Lagarde, stablecoins are assets, not currencies, and must be regulated as such. The ECB is of the opinion that stablecoins are payment systems only if they make value transfer between stablecoin holders possible.

According to the report, the guidance applies to regulators who observe BIS recommendations and to systemically significant stablecoin transactions and principles of use.

The key principles of regulation

BIS’ report provides guidance on transactions with stablecoins based on the key principles of risk management, governance, money settlements, and settlement finality. The last principle refers to certainty that a transaction has been carried out without the risk of being reversed. The report states:

A stablecoin used by a systemically important [stablecoin arrangement] for money settlements should have little or no credit or liquidity risk. It should be noted if the stablecoin provides its holders with the title to or interest in the underlying reserve assets for timely convertibility at par into other liquid assets.

Each jurisdiction decides for itself

The BIS told the press each jurisdiction could decide whether to allow stablecoin transactions or not. If it does and the arrangement is or could become systemic, the PFMI will apply accordingly. The BIS added that certain issues could mandate further study as the functions and features of stablecoin arrangements evolve.

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