BIS published a working paper that examines risks associated with stablecoins, the potential role of stablecoins, and what this implies for the regulation of stablecoins. The paper highlights that one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems, allowing for "embedded supervision." Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could provide more effective solutions to fulfil the functions that stablecoins are meant to address.
The paper sketches market developments for existing stablecoins and describes their potential for embedding a robust monetary instrument into digital environments. It then assesses "global stablecoin" proposals, including the revised Libra 2.0 project of Facebook. Next, the paper discusses the potential regulatory responses, including focus on the necessity of a balanced proportional approach. The paper concludes with a discussion on whether CBDCs or other initiatives could provide more effective solutions to fulfil the functions that stablecoins seek to address. The paper shows a dichotomy between the existing stablecoins and the planned global stablecoins.
The existing stablecoins aim to serve as a means of settlement for automated financial products, offering the possibility of "smart" contracts. Global stablecoin proposals like Libra claim that they will make possible new forms of online exchange through their 24/7 availability, borderless nature, fractionalization, and integration with non-financial services. In this light, they aim to challenge the existing digital means of payment for e-commerce, such as traditional bank payments, credit cards, and electronic wallets. The authors argue that the regulatory responses to global stablecoins should take into account this difference. The response to global stablecoins should address the potential for other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralized systems.
While most stablecoins offer limited financial and monetary stability risk, the advent of global stablecoins raises much larger issues and concerns. Going forward, it is essential for authorities have the tools, skills, and technology to identify the evolution or creation of stablecoins, in particular global stablecoins, and to build appropriate regulatory and supervisory frameworks. Stablecoins and other forms of decentralized finance not only pose regulatory and supervisory challenges but also provide opportunities for embedding supervisory and monitoring frameworks directly into systems during the process of their creation and authorization. This has the potential to enhance achievement of regulatory and supervisory objectives through the technology that was initially targeted with making the role of regulation unnecessary. Looking forward stablecoins may allow for embedded supervision. The authors also suggest that many of these benefits may be achieved with CBDCs and other initiatives such as fast payment systems.
Keywords: International, Banking, Stablecoin, Cryptocurrency, CBDC, Fintech, Libra, Digital Currency, Research, Suptech, BIS
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