Coordinated International Efforts in Regulating Stablecoins: Challenges and Benefits

Introduction

The Bank for International Settlements (BIS) emphasizes the importance of coordinated international efforts in regulating stablecoins. While stablecoin technology presents new financial opportunities, the drawbacks may outweigh the benefits. The BIS Committee on Payments and Market Infrastructures (CPMI) highlights the challenges of stablecoin adoption, including coordination, competition, network scale, market structure, and the lack of consistent and effective regulation.

Benefits and Challenges of Stablecoin Adoption

The use of stablecoins in cross-border payments offers potential benefits such as increased speed, lower costs, expanded options, and improved transparency. However, the challenges associated with stablecoin adoption should not be overlooked. These challenges include the need for coordination among stakeholders, competition in the market, scalability of networks, market structure considerations, and the absence of internationally consistent and effective regulation, supervision, and oversight.

Insufficient Regulation of Stablecoin Service Agreements

The BIS suggests that standard regulation of stablecoin service agreements (SAs) may not be sufficient. Instead, the BIS proposes exploring improvements in existing payment infrastructures or the development of central bank digital currencies (CBDCs) as potential alternatives.

Coordinated International Efforts to Prevent Regulatory Arbitrage

To prevent regulatory arbitrage in stablecoin technology, the BIS emphasizes the necessity of strongly coordinated international efforts. These efforts should strike a balance between avoiding regulatory arbitrage and addressing jurisdiction-specific risks and concerns. Additionally, the BIS highlights the risks faced by emerging market and developing economies (EMDEs), such as currency substitution and potential loss of seigniorage. Authorities may consider taking steps, including the possibility of limiting or prohibiting the use of stablecoin service agreements, to mitigate risks to national payment and monetary systems as well as financial stability.

Recent Cross-Border Trading Experiment

In early October, the BIS, along with three central banks, conducted a cross-border trading experiment using central bank digital currencies (CBDCs) and decentralized finance (DeFi) technology.

Conclusion

In conclusion, stablecoin regulation requires coordinated international efforts to address the challenges and risks associated with this technology. While stablecoins offer potential benefits in cross-border payments, the lack of consistent and effective regulation poses significant concerns. Exploring alternatives such as improvements in existing payment infrastructures or the development of CBDCs may be necessary. It is crucial to strike a balance between regulatory measures and jurisdiction-specific risks to ensure financial stability and mitigate potential risks to national payment and monetary systems.