BIS says a more “restrictive regime” is needed in stablecoin policy guidance

For the second time in three weeks the Bank for International Settlements (BIS) has published a highly critical paper about stablecoins. The previous one outlined how stablecoins are “unsound money” and the latest is entitled “Stablecoin growth – policy challenges and approaches”. The focus is on the challenges, with only hints about approaches and the need for a “more restrictive regime”.

With both papers, there’s a sense of déjà vu. When Facebook unveiled plans for the Libra stablecoin in 2019, regulators and legislators were united in opposing it. But that was six years ago, and the stablecoin genie is now well and truly out of the bottle. With President Trump’s administration embracing the private digital currencies, and stablecoin issuer Circle trading at more than six times its recent IPO price, there’s a definite buildup of momentum, even if it’s long on hype.

That’s likely the point. The BIS probably hopes to bring some of the expectations down to earth.

However, the BIS is known for its thoughtful papers that analyze topics from different angles. By contrast, both recent papers come across as one-sided. There is little to no acknowledgement of any potential stablecoin utility. Only the risks are covered.

The risks are real. But there are ways to mitigate some of them, especially the issues outlined in the previous paper about unsound money. This latest paper focuses on three key policy challenges.

The stablecoin challenges

First are concerns about anti money laundering and the borderless nature of stablecoins. Here the authors fail to fully acknowledge the tremendous progress that has already been made in this regard, with many crypto exchanges now falling into line. Sure, there are certainly still gaps, but that was the case with AML and banks not that long ago. It seems the BIS wants to move beyond monitoring on and off ramps.

“While stablecoin issuers and exchanges can freeze balances, and occasionally do so at the request of public authorities for high-profile cases of financial crime, employing a request-based approach for billions of transactions with pseudonymous addresses would quickly overwhelm the capacity of those authorities,” the authors wrote. There’s no mention of the many services that already exist to monitor transactions, such as Chainalysis and TRM Labs. AI might come in handy as well.

The next issue is monetary sovereignty, which is a genuinely tricky one. The authors note that stablecoins unsurprisingly become popular during bouts of high inflation or exchange rate volatility. Many individuals don’t see why they should pay the price of what is sometimes (not always) economic mismanagement. At the same time, by using stablecoins they exacerbate the problem and the less tech savvy can be impacted even more. There is a real risk of dollarization. While that is problematic on its own in many countries, we’d add that the timing is also not good – with the dollar less likely to be as reliably strong in the future.

The third issue is the use of Treasury bills to back stablecoins, impacting the markets and potentially interest rates. That’s especially the case if there are sudden shifts in and out of stablecoins.

In terms of the policy approaches, there were only hints. The authors conclude that “same risks, same regulations” doesn’t apply because of the cross border nature of stablecoins combined with localized regulations. However, it doesn’t want the concept of technological neutrality to be compromised. There’s the distinct impression that this is because stablecoins are perceived as getting lighter touch treatment by some legislators. Yet the authors still advocate for a ‘restrictive regime’, which they see as justified, although others might view it as compromising neutrality.

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