BIS Calls for Crypto Regulation Amid Stablecoin Legislation

The release from the Bank for International Settlements (BIS) has called for regulators to take swift, aggressive action to regulatory protect against damage in the crypto sector. This call to regulate isn’t happening in a vacuum, as U.S. Congress is debating proposed legislation to regulate stablecoins. We are glad to see the report stress the importance of protecting against financial instability and promoting financial innovation.

The BIS report highlights concerns about the potential for crypto markets to exacerbate income inequality, noting that larger investors might exploit less sophisticated retail participants' emotions. The 2022 FTX collapse is one example of this, according to the report. The consequences of the collapse point toward the need for the regulation of stablecoins.

The report recommends more targeted stablecoin regulation, emphasizing the need for stability and reserve asset requirements. Further, it recommends that stablecoins provide for redemption in US dollars at par value specifically during stressed market conditions. The BIS report is thus a warning. It reasons that the number of investors and the amount of capital pouring into crypto and DeFi has hit a critical mass.

"As prices tumbled in 2022, users actually traded more" - BIS report

The Taming DeFi report points out some notable parallels between DeFi and TradFi. As a final point, it should be noted that DeFi and TradFi share some of the same underlying economic drivers. The BIS report places significant emphasis on what makes DeFi different – smart contracts and composability.

"stability of crypto over and above the role it may have for TradFi and the real economy" - BIS report

At home, legislative momentum seems to be building in the U.S. as well to bring stablecoins into the regulatory fold. On April 2, the US House Financial Services Committee voted 32–17 along party lines to pass the STABLE Act. That’s why this act would provide a clear and consistent regulatory policy for dollar-denominated payment stablecoins. The STABLE Act would promote transparency and put consumers first.

The Senate Banking Committee’s vote of 18–6 in favor of the GENIUS Act on March 13. This bill, short for Guiding and Establishing National innovation for US Stablecoins, has taken another big step toward becoming law. To start, the GENIUS Act sets out a framework for collateralization and requires stablecoin issuers to comply in full with Anti-Money Laundering statutes.