By Leika Kihara
Tokyo - The head of the Bank for International Settlements (BIS) has made a renewed call for international co-operation on how stablecoins are used, describing it as vital to prevent severe market fragmentation.
The central bankers’ central bank — the BIS — has previously raised concerns about stablecoins, a type of cryptocurrency usually pegged 1:1 to the US dollar.
BIS GM Pablo Hernandez de Cos said in Japan on Monday that the potential of stablecoins to undermine monetary and fiscal policy, cause financial market stress and hamper the fight against illicit financing meant global co-ordination was of “critical importance”.
Without it, “divergent regulatory frameworks for stablecoins across jurisdictions could lead to severe market fragmentation or enable harmful regulatory arbitrage,” De Cos warned, referring to when firms seek out the least onerous rules.
The comments come as the US and other leading economies race to build regulatory frameworks for stablecoins and catch up with the likes of Abu Dhabi and Singapore that already have them in place.
Bank of England governor Andrew Bailey, who chairs global financial watchdog the Financial Stability Board, also warned last week that progress on international standards for stablecoins had slowed over the last year.
De Cos reiterated that “runs” on stablecoins could trigger market stress though that risk could be “much reduced” if stablecoin issuers had access to deposit insurance-type arrangements or central bank lending facilities.
Tether and Circle ― the issuers of the world’s two largest stablecoins which account for about 85% of the $315bn in circulation globally ― also exhibit features that make them resemble “securities rather than money”, he said, in particular, imposing “redemption frictions” that lead to frequent deviations from par.
“In this respect, they currently operate more like exchange-traded funds than like money,” he said.
He also gave his view on the debate around whether stablecoins should be allowed to pay interest in the same way that traditional bank accounts do.
“Shifts from bank deposits to stablecoins may also be less pronounced if stablecoin holdings remain unremunerated and the opportunity cost of holding them is high, such as during periods of high interest rates,” the BIS head said.
“And if prohibitions on paying interest on stablecoins can be enforced.”
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