Basel Banking Committee Proposes Stricter Guidelines to Classify Stablecoin as Less Risky Than Unbacked Cryptocurrencies

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The Basel Committee for Banking Supervision (BCBS) wants to tighten rules to classify stablecoins as less risky assets than Bitcoin (BTC) and other unbacked cryptocurrencies.

In a recent consultative paper, the international standard setter proposed 11 rules to guide banks’ exposure to crypto assets highlighting areas such as credit maturity, liquidity, and asset reserve. 

According to the report, the committee seeks changes to the requirements on how banks can include stablecoins they are exposed to and promote technical amendments to the standard to understand crypto assets. 

All stakeholders are expected to comment on the proposed amendments before March 28, 2024, through the website and all inputs will be published unless marked as confidential.

Amendments to the stablecoin guidelines

The composition of reserve assets has been pushed by several regulators over the years to protect investors by ensuring that all assets are fully backed. New proposals include redemption risk tests and additional safeguards in periods of extreme stress.

A major change is stressing the maturity of reserve assets because short-term assets carry less risk than longer-term counterparts in the event of crises requiring a mass withdrawal of assets by users. To maintain shorter maturity rates, banks will need to adopt a maturity limit for individual reserve assets and an average limit for a pool of assets.

“The reserves assets that are used to cover redemptions can pose various risks that call into question the ability of the stablecoin issuer to meet holders’ expectations of redemption on demand.” 

In cases of longer-term assets or when short-term assets are limited, reserve assets must be over-collateralized to cover a decline and avoid losses. 

Secondly, reserve assets would need to be invested in high-quality products like the central bank’s reserve where the stablecoin issuer is eligible and marketable securities of central banks with high quality.

Regulators stress on liquidity 

Furthermore, the draft states that stablecoins issuers should move towards assets with lower volatility to prevent future loss of assets and ensure price stability.

Other requirements include active and sizable markets to the effect that reserve assets should be traded in larger markets with sufficient liquidity. Stablecoin issuers are expected to have a risk management framework to monitor credit, market, and concentration risks.

Disclosure requirements are also required for authorities to assess risk factors and proper analysis as pushed by several regional regulators.

“The standard also requires the reserve assets to be subject to an independent external audit at least annually to confirm that they match the disclosed reserves and are consistent with the mandate. These requirements will be strengthened to include a requirement for the disclosed reserve assets to be verified by an independent third party at least semi-annually.”

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