Stablecoins are at the heart of the evolution of the financial system, but regulators’ desire to exert control over them risks undermining the fundamental value of the technology. While the desire to regulate is understandable, for those jurisdictions that wish to become hubs for cryptoasset and tokenisation businesses, enabling stablecoins will be a major competitive advantage.
US President Donald Trump’s 23 January executive order on digital assets, though light on detail, seemed to indicate a willingness to allow dollar-backed stablecoins to flourish both within and outside US borders.
Local regulations, in particular the European Union’s Markets in Crypto-Assets Regulation, often require issuers to be locally regulated and hold backing assets in locally regulated institutions. These represent an understandable desire to mitigate the risk of disruption to services or losses to local customers.
But these requirements can undermine the benefits stablecoins should deliver. Global fungibility is fundamental to the value of a stablecoin. If issuance is required to be local, then as stablecoins cross borders, the legal claim for redemption will have to shift to a new entity, which may require backing reserves to ensure that the local entity can meet possible redemption requests. The need for claims and reserves to cross borders will reintroduce frictions that stablecoins are meant to remove, increasing costs and delays for end users.
Even estimating the requirements for a locally issued stablecoin may be difficult. A local entity would most likely be responsible for redemptions within its jurisdiction, but since stablecoin issuers do not have a direct relationship with their users, it can be difficult to estimate the extent of local holdings, since international transfers will mean that the outstanding stablecoins in a jurisdiction will differ from its net issuance. Local issuers will have to rely on data from exchanges to estimate their liability and, when these are decentralised, these data may not be available.
Splitting up global stablecoins into local entities can also compromise their resilience. For instance, if a local bank fails, it could have an outsized impact on a locally issued stablecoin, whereas for a global stablecoin, the failing bank would be one of many reserve banks, within and outside the region, so the impact would be diffused.
Four principles for regulators to consider
If stablecoins are to function globally, regulators should bear the following principles in mind. First, digital asset market development will be best supported by allowing a variety of stablecoins to circulate, including those issued overseas. This would increase choice and support innovation within the ecosystem.
Second, jurisdictions should take a proportionate and risk-based approach to overseas issuers. Overseas-issued stablecoins should generally be permitted to circulate in a jurisdiction without a requirement for local issuance so long as reasonable safeguards are in place.
For example, in Singapore, overseas-issued stablecoins are regulated as digital payment tokens rather than being subject to the full framework for single currency stablecoins. This means that value stability and redemption isn’t regulated, while minimum standards are applied for anti-money laundering and combatting the financing of terrorism obligations, consumer protection and market integrity, allowing overseas-issued stablecoins to be used as a means of payment under the Payment Services Act 2019.
Regulators may wish to confirm that overseas-issued stablecoins are subject to a sufficiently high standard of regulation in their home jurisdiction that meets agreed international standards. For example, the overseas issuer might be required to secure an expert legal opinion on the home regulatory regime, including redemption arrangements.
Third, where local issuance is required, regulators should take a holistic approach to ensuring the local regulated entity is able to meet redemption requests. This should be based on reasonable scenarios for redemption requests, including in stress, and should reflect all the resources the redeeming entity can draw on including globally fungible buffers.
Finally, close supervisory co-operation between jurisdictions can underpin these arrangements and unlock greater fungibility. Supervisory co-operation can help a host jurisdiction to understand the risks posed, assess the protections in the home jurisdiction and monitor how an arrangement is working. In the longer term, more formal mechanisms that are used in other sectors, like regulatory colleges or equivalence arrangements, could further support international fungibility of stablecoins.
The global regulatory landscape for stablecoins and other digital assets is vast and varied. As the market and subsequent policy frameworks continue to evolve, regulators and policy-makers will play a key role in paving a path to greater institutional and end-user adoption of fiat-backed stablecoins.
Matthew Osborne is Policy Director, EMEA at Ripple.
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