BIS Report Suggests Private Stablecoins & CBDC’s Allow for ‘Embedded Supervision’

A new BIS report looks at the potential, risks, and regulation of stablecoins has suggested the embedment of supervisory requirements into stablecoin networks. The report, co-authored by three experts from the Bank of International Settlements (BIS), was published on Nov 24 as working paper No. 905. This is the latest BIS report on the emerging digital currency space, having recently released a CBDC report in collaboration with seven major central banks.

The new report breaks down the stablecoin dichotomy into existing stablecoins whose focus is to support financial innovations in crypto and global stablecoins, such as Facebook’s proposed Libra coin. While the latter is yet to get regulatory approval, it came as a wake-up call to financial watchdogs and central banks worldwide. Word has it that China accelerated the rolling out of its CBDC ‘digital yuan’ on the news that Facebook had tabled a prospective digital currency.

Call for Supervisory Integration

According to the BIS report, stablecoins are a possible threat to the current money and payment networks, should they be adopted on a mainstream level. Therefore, the report calls for a revised approach in the supervision of stablecoin issuance and distribution into monetary ecosystems. This publication was keen to note that the changing horizon in money and payments are captured in stablecoins,

“These trends are embodied in private “stablecoins”: cryptocurrencies with values tied to fiat currencies or other assets.”

Consequently, an introduction of supervisory measures will be necessary for preparation for the future when stablecoins go mainstream. In that case, a properly monitored ecosystem will cut compliance costs and facilitate open-source solutions to implement the underlying regulatory frameworks. The paper also mentions that there would be enforceable legal finality of payments.

A Possible Proposition

The report’s final argument is that a supervisory oversight would be necessary given the potential in global stablecoins as we move into the digital currency era. It supports this take with the example of Fintech payment providers like Alipay, which run centralized payment networks while ensuring compliance and proper checks through data reporting.

Likewise, stablecoins can run with an embedded supervisory oversight such that the data reporting process is automated. The report reads,

“Stablecoin proposals are one area where embedded supervision may work in practice. Information is a central function of regulation, both from the standpoint of enhancing market functioning and efficiency, and as from the standpoint of supervision, whether for purposes of market integrity, customer and investor protection, or prudential supervision.”

Notably, this report suggests that CBDC’s are more likely to achieve supervisory oversight in stablecoin ecosystems.

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