Global Regulator's New Proposals Could Impact Stablecoins' Risk Treatment

• Basel Committee Proposes Revised Criteria for Stablecoin Risk Evaluation
• New Classification Criteria for Stablecoins
• Regulatory Treatment for Stablecoins With Effective Stabilization Mechanisms

Basel Committee Proposes Revised Criteria for Stablecoin Risk Evaluation

The Basel Committee for Banking Supervision (BCBS) has suggested alterations to the guidelines that define stablecoins as less hazardous compared to non-backed cryptocurrencies like bitcoin. This proposal was presented in a consultation paper on Thursday.

New Classification Criteria for Stablecoins

According to recent updates, the global banking regulator is contemplating a revamp of classification guidelines for stablecoins. These are cryptocurrencies that are designed to maintain their value equivalent to reserve assets such as the U.S. Dollar. The consultative document, shared last week, explains these proposed alterations with clarity.

Thus far, BCBS's position on cryptocurrencies has been stringent. They have suggested a maximum potential risk weight of 1,250% for non-stabilised digital assets like bitcoin. Accordingly, banks are required to issue capital equal to their exposure. Additionally, banks cannot allocate more than 2% of their core capital to these high-risk assets. BCBS has confirmed that these norms will remain unchanged.

Regulatory Treatment for Stablecoins With Effective Stabilization Mechanisms

However, cryptocurrencies with robust stabilization mechanisms may be eligible for a more favorable Group 1b regulatory treatment. Under these conditions, stablecoins could be subject to capital requirements based on the risk weights of underlying exposures, as defined in the existing Basel Framework. This is a departure from the stricter regulations imposed on bitcoin and similar assets.

Currently, for stablecoins to qualify for this preferential regulatory treatment, they must be redeemable at all times. This ensures that only stablecoins produced by overseen and regulated entities with strong redemption rights and governance will qualify for inclusion, as stated by BCBS.

Edited by Jonathan Stoker