BIS Hits Stablecoin Threats to TradFi Stability and Monetary Sovereignty
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The BIS is once again warning about stablecoins, this time claiming that the increasing linkages to the traditional financial (tradfi) system are creating new risks for regulators.
The response from the crypto community will remain the same; they will once again claim that the BIS is biased and call it a grandpa who knows nothing.
The BIS, in calling out crypto’s shortfalls, makes few friends and disrupts the never-ending hype surrounding crypto and stablecoins, but we ignore them at our peril.
I am a stablecoin proponent, but the BIS has a point. Any new technology added to the financial system requires careful evaluation, and it’s not clear to me that anyone has done that adequately with stablecoins. The proverbial cart is before the horse.
What is clear is that the BIS is concerned and willing to consider a “more restrictive regime” than that used for tradfi as stablecoins “operate without established safeguards.”
In the end, it is the BIS that holds the regulatory cards, and stablecoin purveyors would do well to respect their elders.
👉The BIS’s key claims and why they are right:
🔹 Stablecoins' linkages with the traditional financial system are growing, which raises policy challenges ranging from preserving financial integrity to mitigating financial stability risks.
This is unquestionably true, stablecoins are making their way into tradfi, and while that isn’t all bad, the potential for depegging is real. In addition, crypto markets are volatile and crashes are “a feature, not a bug,” and this volatility may be transferred to tradfi via stablecoins.
Is this manageable? Yes, without question, but as the BIS says, this is a serious regulatory issue. Should stablecoins get the same risk weighting as cash under the BIS’s Basel 3 Capital Adequacy Requirements? This may seem boring to crypto fans, but these are key questions that banks and regulators will have to decide.
🔹 Broader use of foreign currency-denominated stablecoins could raise concerns about monetary sovereignty and, in some jurisdictions, erode the effectiveness of existing foreign exchange regulations.
Monetary sovereignty has been raised as an issue for stablecoins by no less than the European Central Bank and the UNDP, both of whom are concerned about dollar substitution.
While the ECB is satisfied with the protections offered by MiCA regulations, most emerging market nations lack these regulations. This is why the UNDP has already issued warnings for stablecoins substituting for local currencies and potentially destabilizing them.
Meanwhile, all we here from the crypto world is that US dollar stablecoins are the answer to inclusion. Their willingness to sacrifice local currencies is stunning.
🔹 The principle of "same risks, same regulation" faces limitations in the context of stablecoins, highlighting the need for tailored regulatory approaches that address the nature and specific features of stablecoins.
Should stablecoins get a break with favorable regulatory treatment? Absolutely not, and if stablecoins don’t fit in existing regulations, new ones must be crafted.
Stablecoins have enjoyed favorable treatment for years and have created a two-tier dollar transfer system. One tier for stablecoins without AML/KYC, and a second for banks with restrictions. In fact one reason for stablecoin’s tremendous growth is the advantages they have due to this regulatory arbitrage, particularly with money launderers.
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