Principles for Financial Market Infrastructures should be applied to stablecoins: BIS

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) of the Bank for International Settlements (BIS) published guidance on stablecoin regulation this past July 13.

The press release stated that the guidance aims to apply the “same risk, same regulation” legal approach to systemically important stablecoins used for payments.

The guidance compares the transfer function of stablecoins to that performed by other financial market infrastructures (FMIs). Therefore, the Principles for Financial Market Infrastructure (PFMI) would have to be observed by stablecoins that can be transferred and are deemed essential to the financial system.

The PFMI refers to international standards set down for financial institutions. The scope of the PFMI is to enhance the safety and efficiency of financial institutions, limit systemic risk, and foster transparency and financial stability.

Which stablecoins need to follow PFMI and how

The PFMI already provides guidelines to determine which FMIs are essential. For instance, any FMI that has the potential to trigger a systemic disruption is considered to be important. To identify which stablecoins are important, the BIS guidance has laid down further criteria.

This includes the size of the stablecoin, which can be determined through various data points, including the number of users and transactions, the value of transactions, and the value of stablecoins in circulation.

While assessing the importance of stablecoins, authorities also need to consider the risk profile of the stablecoin, how connected it is to the traditional financial system, and whether or not it can be substituted for time-critical services the BIS report said.

The report, however, said that countries could choose whether or not they want to make the observance of PFMI mandatory for stablecoins.

The BIS guidance has elaborated on governance, risk management, settlement finality, and money settlements that stablecoins should follow. For instance, the BIS report said there should be one or more clearly identifiable legal entities operated by a few people who can be held responsible and accountable. Additionally, stablecoin issuers need to monitor the stablecoin’s risks regularly and implement appropriate risk management frameworks to mitigate those risks.

The BIS report added that stablecoin issuers need to minimize and strictly control the credit and liquidity risks of the stablecoin and…