Global Regulation of Stablecoins Slows Down, Prompting Calls for Cooperation to Mitigate Fragmentation Risks

The development of international standards for stablecoins has experienced a significant slowdown over the past year, raising concerns among central bankers about the potential for market fragmentation and increased risk. Bank of England Governor Andrew Bailey, who chairs the Financial Stability Board, has stated that progress on global rules has stalled, as reported by Reuters. This has prompted the General Manager of the Bank for International Settlements (BIS), Pablo Hernández de Cos, to emphasize the importance of global cooperation in avoiding a patchwork of regulations that companies could exploit. De Cos warned that without international alignment, firms may relocate to jurisdictions with less stringent oversight, a practice known as regulatory arbitrage. As major economies move forward with their own frameworks, often with different approaches and timelines, the stablecoin sector has grown significantly over the past few years, now accounting for $320 billion, according to DeFiLlama. The majority of this figure is comprised of Tether's USDT and Circle Internet's USDC. De Cos noted that the structure of these stablecoins can resemble securities more than traditional cash, and that redemption issues can cause prices to deviate from their intended value of $1. He also highlighted the potential for sudden withdrawals to have a ripple effect on markets. To reduce risk, proposals have been put forth to limit interest payments on stablecoins and provide issuers with access to central bank lending facilities or deposit-insurance-type arrangements. Policymakers argue that such measures could enhance the safety of the sector while preserving its role in digital payments. In the United States, lawmakers are working to advance the Digital Asset Market Clarity Act, which aims to establish federal rules for digital asset markets. The bill, which passed the House last year, is currently before the Senate, where committee chairs are leading the effort to move it forward. While a compromise on stablecoin yield has been negotiated, a deal remains contingent on resolving several outstanding issues, including oversight of DeFi and ethics provisions.