The Bank for International Settlements recently underscored the pressing need for streamlined stablecoin regulations across global jurisdictions. According to their extensive survey, which encompassed 11 different regions, the patchwork nature of current laws is a major roadblock for stablecoin integration into the international financial system. They’ve gone as far as to label the situation as “urgent,” pointing out that while stablecoins have tremendous potential, the diverse regulatory landscape is more of a bane than a boon.
Regulatory Patchwork: A Global Conundrum
Global policymakers, like the Financial Stability Board and various standard-setting bodies, have indeed been busy. Over the past few years, they’ve advanced their policy frameworks specifically targeting cryptoassets, including stablecoins. For instance, just this past July, the FSB unveiled a set of high-level recommendations focusing on the regulation, supervision, and oversight of cryptoasset activities and markets.
Different jurisdictions have taken varying approaches to regulate these cryptocurrencies. Some, like those in the European Union, allow banks to notify authorities when launching stablecoins, while others, such as the UK, require a separate entity for issuance to mitigate risk and ensure solvency.
On top of these variations, there are two primary licensing types emerging. The first permits traditional financial institutions to handle stablecoins under existing financial regulations, while the second introduces a new, crypto-specific licensing category that demands detailed compliance from issuers.
The push for harmony is evident as many countries strive for consistent objectives—market integrity, consumer protection, financial stability, and fostering innovation in payment systems. Yet, the reality remains disjointed, with each region setting its own rules that sometimes overlap, sometimes contradict, and too often confuse.
The Devil is in the Details: Licensing and Reserve Standards
Licensing isn’t the only maze for stablecoin issuers to navigate. The management of reserve assets—essential for maintaining the stablecoin’s value against its peg—differs widely as well. These reserves, crucial for the redemption promises made by issuers, must typically consist of cash or low-risk assets. However, the specifics, such as the required liquidity and the composition of these assets, can vary significantly across borders.
For instance, while some jurisdictions might not specify asset types, others like the EU mandate a minimum cash reserve. Auditing these reserves is another layer of complexity, with requirements for frequency and depth of reporting varying drastically from one region to another. Some countries demand monthly attestations, others are satisfied with annual checks, and a few even require immediate reporting post-audit.
Moreover, stablecoin issuers face a gamut of regulatory demands concerning their operational conduct. From governance and risk management to technology and cybersecurity, the standards are as diverse as they are stringent. Notably, the expectation extends to internal controls and procedures that ensure liquidity, manage operational risks, and prevent financial crimes such as money laundering.
The practical implications of these diverse requirements are significant. They not only affect how stablecoins are issued and managed but also influence public confidence in these assets. The lack of consistent information on reserve quality, for example, can lead to uncertainty and instability, threatening the very essence of what makes stablecoins “stable.”
