• Basel Committee for Banking Supervision has proposed to tighten the criteria for stablecoins.
  • The regulator is looking to make sure that the reserve assets of stablecoins have a short-term maturity and high credit quality, as well as low volatility. This will allow them to meet redemption expectations from holders.

The Basel Committee for Banking Supervision wants to impose more stringent criteria for stablecoins being treated as less risky compared to unbacked cryptocurrencies like bitcoin (BTC).

In a document of consultation published on Thursday, the global bank regulator proposed 11 standards to govern stablecoins. These are cryptocurrencies that have a value pegged to an asset, such as the euro, dollar or gold. Stablecoin reserves must meet certain criteria to be considered for the so-called Group 1b. These include a short maturity period, a high credit rating, and low volatility. The consultation will run until 28 March.

The paper stated that “the reserves assets used to cover redemptions may pose various risks, which call into question whether the stablecoin issuing company can meet the holders’ expectation of redemption on request.”

Standard-setters have taken a hard stance against crypto. They recommend a risk weight maximum of 1,250% on digital assets that are free-floating, like bitcoin. This means banks must issue to match their exposure. The banks are not allowed to allocate any more than 2% core capital towards these riskier assets. In a press release, the BCBS said that it would not be changing these standards.

Stablecoins, which are cryptos that have “effective stabilization mechanism” qualify for “preferential group 1b regulatory treatment.” They are then subject to capital requirements based on risk weights for underlying exposures, as defined in the Basel Framework.

Stablecoins are required to be redeemable “at all times” in order to receive this preferential treatment. The BCBS said that only stablecoins from supervised and regulated organizations with robust governance and redemption rights are eligible to be included.

The Basel Committee said that stablecoins which do not meet its conditions are instead placed in Group 2 and subject to a “new highly conservative capital treatment” according to the document.

Criteria for Evaluation

The committee stated that in order to meet Group 1b, stablecoin reserve assets would have to “comprising largely of short-term maturity assets.”

To reduce the credit risk , which is the loss of money when borrowers fail to repay their loans, reserves “should invest in assets with a high credit quality.”

The assets should have low volatility. “Assets with relatively stable prices and less susceptible to market stress are more likely liquidated quickly, with minimal adverse effect on price to meet redemption demands,” said the report.

Reserves must also be protected against the bankruptcy of anyone involved in the stablecoin operations.

The consultation stated that “this means that any other creditors of these parties, as well as any creditor of the custodian, must have no claim on the reserve assets except where such parties also hold stablecoins.”

A growing number of organizations are looking at ways for assessing the quality of stablecoins, given their popularity. S&P Global, a global rating agency, launched its stablecoin stability assessment earlier this week. They scored them on a scale of 1 (strong) through to 5 (weak). The assessment examined how well a currency could adhere to the asset to which it was pegged. Asset quality risks were one of the factors that the body considered when assessing the stabilitycoin’s ability to remain tied to its peg.

In a recent press release, Lapo Guadagnuolo said that stablecoins are becoming more embedded in the financial markets. They act as a bridge between digital assets and real world assets.

S&P’s new industry ranking is a slap on the face of Tether’s USDT.

Updated (Dec. 14, 13:30 UTC): Added details from the consultation and S&P global context to the last two paragraphs.

Sheldon Reback is the editor.