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A recent analysis by the Bank for International Settlements (BIS) across 11 different jurisdictions has revealed that the global potential of stablecoins is being curtailed by the lack of harmonized regulatory frameworks. The report stresses the pressing need for coherent regulation of stablecoins, indicating that the current diversity in rules across countries poses a significant risk to their seamless integration into the global financial ecosystem.
Although there are similarities in how various regions approach the regulation of stablecoin issuers, including requirements for reserves, risk management, and Anti-Money Laundering (AML) protocols, the report emphasizes the discordance in the regulatory treatment of stablecoins. The differences in how stablecoin issuances are structured mean they could fall under banking, securities, commodities, or payment system regulations depending on the jurisdiction.
One notable area of divergence is in the treatment of algorithmic stablecoins, which are not tied to any external assets, as opposed to those pegged to fiat currencies. While countries like the United Kingdom, Japan, and Singapore regulate these two types of stablecoins differently, some places in the United Arab Emirates have imposed a complete ban on algorithmic stablecoins. The report points out:
“The variance in regulations seems to be influenced by the distinct features of stablecoins, the perceived risks they pose, and the nature of the entities issuing them. This regulatory fragmentation could significantly impede the functioning of a cohesive financial system.”
Furthermore, the report details how the requirements for reserve segregation, custody, audits, and liquidity can vastly differ, adding layers of complexity for stablecoin operations across borders.
The document also calls for a more in-depth examination of how stablecoins interact with emerging financial technologies such as central bank digital currencies (CBDCs), tokenized deposits, and other digital assets, suggesting that technological and cybersecurity standards are more consistently applied across jurisdictions.
This analysis follows on the heels of a set of stablecoin regulatory recommendations released by BIS in February, urging global cooperation to tackle issues related to disclosure, risk management, and redemption practices among others.
The report also highlights the efforts of international organizations, including the International Monetary Fund (IMF), Financial Stability Board (FSB), Financial Action Task Force (FATF), Basel Committee on Banking Supervision (BCBS), and International Organization of Securities Commissions (IOSCO), in advancing stablecoin policies, underscoring the global recognition of the need for regulatory alignment in the digital currency space.
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