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

The development of global standards for stablecoins has decelerated over the past year, sparking concerns among central bankers that regulatory gaps could lead to market fragmentation and increased risk. Bank of England Governor Andrew Bailey, who chairs the Financial Stability Board, noted that progress on international rules has come to a standstill, according to recent reports. This slowdown has raised concerns, with Bank for International Settlements General Manager Pablo Hernández de Cos emphasizing the need for cooperation to avoid a fragmented regulatory landscape. De Cos warned that without international coordination, companies may take advantage of regulatory differences by shifting operations to jurisdictions with more lenient oversight. The stablecoin market has experienced significant growth, with a current value of $320 billion, largely dominated by Tether's USDT and Circle Internet's USDC. De Cos highlighted that the structure of these stablecoins can be more similar to securities than traditional currency, and that redemption issues can cause price fluctuations. He also warned that sudden withdrawals could have far-reaching consequences for the market. To mitigate these risks, proposals include limiting interest payments on stablecoins and providing issuers with access to central bank lending facilities. Policymakers believe 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 has passed the House and 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, the deal remains contingent on resolving several outstanding issues, including oversight of DeFi and ethics provisions.