Global Banking Regulator Wants Tougher Criteria for Giving Stablecoins Preferential Risk Treatment

The Basel Committee for Banking Supervision wants to tighten requirements that allow stablecoins to qualify as less risky than unbacked cryptocurrencies like bitcoin.

AccessTimeIconDec 14, 2023 at 10:09 a.m. UTC
Updated Mar 9, 2024 at 1:51 a.m. UTC
  • The Basel Committee for Banking Supervision proposed tightening the criteria governing stablecoins.
  • The regulator wants to ensure that stablecoins' reserve assets have the short-term maturity, high credit quality and low volatility that allow them to meet holders' expectations for redemption.

The Basel Committee for Banking Supervision (BCBS) wants to impose stricter criteria for allowing stablecoins to be treated as less risky than unbacked cryptocurrencies such as bitcoin (BTC).

In a consultative document published Thursday, the global banking regulator proposed 11 standards for stablecoins, cryptocurrencies whose value is supposed to be pegged to a specific asset such as the dollar, euro or gold. To qualify for so-called Group 1b consideration, stablecoin reserve assets have to meet a range of criteria including having a short-term maturity, high credit quality and low volatility. The consultation runs until March 28.

"The reserves assets that are used to cover redemptions can pose various risks that call into question the ability of the stablecoin issuer to meet holders’ expectations of redemption on demand," the paper said.

The standard-setter has so far taken a tough stance on crypto, recommending the maximum possible risk weight of 1,250% for free-floating digital assets like bitcoin, which means banks have to issue capital to match their exposure. Banks are also not allowed to allocate more than 2% of their core capital to these riskier assets. The BCBS will not be making any changes to these standards, it said in a statement.

However, cryptos with "effective stabilization mechanisms" – which covers stablecoins – qualify for "preferential Group 1b regulatory treatment." This means they are subject to "capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework," instead of the tougher requirements set for bitcoin and other cryptocurrencies.

Right now, stablecoins must be "redeemable at all times" to qualify for this preferential regulatory treatment. This ensures "only stablecoins issued by supervised and regulated entities that have robust redemption rights and governance are eligible for inclusion," the BCBS has said.

Stablecoins that do not meet the Basel Committee's conditions qualify instead for the Group 2 category and are subject to "a new highly conservative capital treatment," the committee said in the consultation document.

The Criteria

The committee said that to meet the Group 1b criteria, stablecoin reserves would need to be "comprised largely of assets with short-term maturities."

To reduce credit risk, the financial loss that can occur when borrowers are not able to repay their loan, the reserves "should be invested in assets with high credit quality."

They should also have low volatility: "Assets whose prices remain relatively stable and are less prone to stressed market conditions are more likely to be liquidated rapidly with minimal adverse price effect to meet redemption requests," the report said.

The reserves also need to be protected from the bankruptcy of any party involved in a stablecoin's operations.

"This means that other creditors of those parties as well as any creditors of the custodian must have no claims on the reserve assets, except where such parties are also stablecoin holders," the consultation said.

Organizations are also looking for ways to assess the quality of stablecoins - given their rise in popularity. Earlier this week global rating agency S&P Global launched its stability assessment for stablecoins - scoring them from 1 (strong) to 5 (weak). The assessment looked at how well a stablecoin could stick to the asset it is pegged to. One of the things the body assessed when measuring the stablecoins ability to stay tied to its peg was asset quality risks.

"As we look to the future, we see stablecoins becoming further embedded into the fabric of financial markets, acting as an important bridge between digital and real-world assets," Lapo Guadagnuolo, senior analyst at S&P Global Ratings, said in a press release.

Update (Dec. 14, 13:10 UTC): Adds details from the consultation throughout and S&P Global context to last two pars.

Edited by Sheldon Reback.


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