Global financial regulators say the operators of digital tokens pegged to fiat currencies—stablecoins—must follow the stringent rules for other important financial infrastructures, such as payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories.
The new requirement for stablecoins to operate with minimal liquidity and credit risks will come as a challenge for token issuers like the $69bn stablecoin Tether.
In a new consultation paper released earlier today, the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO), said the operators of systemically important stablecoins must follow the 2012 Principles for Financial Market Infrastructures (PFMI).
The PFMI are a set of rules brought in after the global financial crisis to ensure the stability of critical elements of the global financial network.
They include twenty-four principles, setting out instructions for market infrastructures’ general organisation, credit and liquidity risk management policies, settlement procedures, default and operational risk management, and transparency.
“A stablecoin used by a systemically important stablecoin arrangement for money settlements should have little or no credit or liquidity risk,” the BIS and IOSCO said in their new consultation paper.
“The stablecoin arrangement should consider whether the stablecoin provides its holders with a direct legal claim on the issuer and/or claim on, title to or interest in the underlying reserve assets for timely convertibility at par into other liquid assets,” BIS/IOSCO went on.
Up to now, Tether—unlike money market funds which perform a similar role—has refused to disclose the exact composition of its reserves.
In its latest, end-June attestation report, Tether said its 49 percent of its stablecoin’s reserves were in commercial paper and certificates of deposit, with an average credit rating of A2.
An A2 rating for short-term debt is equivalent to a credit rating for long-term debt in the A- to BBB range.
According to credit rating agency Standard and Poor’s (S&P), a BBB long-term rating implies adequate capacity of a debt issuer to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the BBB-rated issuer to meet its financial commitments, S&P says.
Up to now, Tether—unlike money market funds which perform a similar role—has refused to disclose the exact composition of its reserves.
Other operators of stablecoins have moved this year to limit their exposure to credit risks
Last month Tether, which has in the past been shown to have lied about its asset backing, issued a statement to deny it had lent part of its reserves to Evergrande, the embattled Chinese property developer.
“Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so,” the company said on September 16.
Other operators of stablecoins have moved this year to limit their exposure to credit risks.
In August, Circle and Coinbase, which are part of a consortium issuing the $32bn stablecoin USDC, said they were shifting all the stablecoin’s reserves into cash and short-term US government bonds, foregoing riskier investments.
A month earlier, Circle had said that USDC’s reserves included corporate bonds and commercial paper.
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