BIS Intensifies Regulations on Permissionless Stablecoins, Impacting USDT and USDC

In a move that has sent ripples through the cryptocurrency market, the Bank for International Settlements (BIS) has introduced new guidelines that could significantly impact the future of certain stablecoins. These digital currencies, designed to maintain a stable value against traditional currencies, are at the heart of the crypto market’s functionality, providing a bridge between the volatile crypto space and the steadier world of fiat money. However, the BIS’s latest directive puts the spotlight on stablecoins like Tether’s USDT and Circle’s USDC, which operate on permissionless blockchains, indicating they might face stringent regulatory challenges ahead.

On July 17, the Basel Committee on Banking Supervision, under the BIS, unveiled a comprehensive report outlining the final standards for banks’ exposure to crypto-assets. The report emphasizes the necessity for banks to provide detailed qualitative and quantitative assessments of their engagements in the crypto sector, alongside adhering to specific liquidity requirements aimed at ensuring financial stability. More critically, the report delineates criteria for the classification of stablecoins, introducing a “Group 1b” category that entails a preferential regulatory framework. However, this classification is narrowly defined, effectively sidelining stablecoins issued on permissionless blockchains, such as USDT and USDC.

This development coincides with the Hong Kong Monetary Authority’s announcement of consultation papers proposing a licensing regime for stablecoin issuers, demonstrating a global trend towards tighter regulation of digital currencies. The BIS’s stance has sparked a debate within the crypto community, with veterans and industry insiders expressing concerns over the potential exclusion of widely-used stablecoins from formal banking systems.

Caitlin Long, CEO of Custodian Bank, voiced her disappointment over the BIS’s decision, highlighting the significant shift away from the inclusive approach previously anticipated from the institution. Long suggests that the United States might overlook the BIS’s guidelines, a sentiment that underscores the divergent regulatory paths being adopted across the globe. During a recent event hosted by Coinbase, BlackRock’s Head of Digital Assets pointed out the advantages of public blockchains over private ones, an opinion that contrasts sharply with the BIS’s new preference for permissioned stablecoins.

The BIS’s guidelines could reshape the landscape for digital currencies, compelling banks to gravitate towards permissioned stablecoins, such as JPMorgan’s JPMCoin. This shift would represent a significant pivot from the current market, where permissionless stablecoins like USDT play a pivotal role. Reports from Fox Business further illuminate the evolving regulatory environment, indicating initial proposals might have included broader support for stablecoins like USDC before the final guidance opted for a more restrictive approach.

The implications of the BIS’s guidance are far-reaching, potentially stifling innovation and limiting the accessibility of stablecoins to the broader financial system. As the regulatory landscape continues to evolve, the crypto industry finds itself at a crossroads, facing the challenge of adapting to new standards while striving to maintain the principles of openness and accessibility that have been central to its growth.