Central banks playing catch-up in bid to influence stablecoin legislation

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The European Central Bank has urged legislators to speed up crypto regulation in the wake of the TerraUSD stablecoin collapse. 

A proposed legal bill to regulate crypto markets in the European Union (EU) is set to be fully approved later this year, setting an international benchmark for the space’s regulation.

When contacted by Protos, The Bank for International Settlements (BIS) refused to comment on the proposed Regulation on Markets in Cryptoassets (MiCA) legislation, stating that the BIS “as a general policy, does not comment on individual jurisdictions or their policies.”

The BIS has not made any public comments about MiCA, but its officials did in fact raise concerns to the press when El Salvador adopted its Bitcoin policy. And although the BIS may be keeping quiet on current legislative developments in Europe, it does hold a position on stablecoins which is in clear divergence with that of the EU’s legislators.

In its Economic Annual Report for 2021, the BIS published a chapter on crypto-currencies in which it took a very similar position to the ECB’s, which described stablecoins as a potential threat to financial stability. 

The BIS also believes that stablecoins can be a threat to financial stability, although it didn’t go into detail regarding what it considers to be a systematic financial risk.

In a more recent report published by the BIS Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities (IOSCO), the potential systematic risk of stablecoins is described in more detail. The guidance report describes a potential scenario where a single stablecoin issuer may dominate the payments market of a particular country.

The guidance report argues that stablecoins should follow the Principles for Financial Markets Infrastructures (PFMI) which are applied to market infrastructure participants such as SWIFT and VISA, in addition to specific regulations. If applied to stablecoin issuers these standards would ensure that those issuers are compliant with the law in every jurisdiction they operate in, and also make them fully disclose to their clients their credit and liquidity risks, something which Tether has so far failed to do.

The BIS wording in the annual report on stablecoins makes it clear that the BIS is campaigning for the use of CBDCs instead of stablecoins. The BIS describes stablecoins as “often less stable than their issuers claim” and claims that they “tie up liquidity and can fragment the monetary system, thus undermining the singleness of the currency.”

Surprisingly, the report also goes in-depth to describe why both cryptocurrencies and stablecoins can never be as good as fiat money, mostly by using the argument that the value of private money doesn’t have the support of the “nominal anchor” of the central bank. However, the case made by the BIS against stablecoins is discordant with the EU legislators’ drive to regulate them. 

A bi-partisan bill regulating stablecoins in the US is also currently scheduled to be discussed in Congress following the August recess.

Read more: Algorithmic stablecoin collapse may crash crypto markets again, says IMF

The BIS may have been left behind as legislators across Europe and the US rush to legislate on stablecoins. A source who’s privy to the workings of the BIS has told Protos that at the BIS, years have been spent researching and analyzing crypto and the BIS is finally at the stage of consolidating its official position.

However, it seems legislators have already reached their own conclusions while the BIS is still slowly rolling out its formal positions. 

A BIS lead project called Helvetia to test the roll-out of CBDCs is still ongoing.

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