BIS Claims Stablecoins Have Failed to Live Up to Expectation
- Analysts at BIS claim stablecoins have struggled to consistently maintain their peg.
- Several countries are setting up guidelines for stablecoin issuers as part of their efforts to regulate the market.
- The European Banking Authority (EBA) recently proposed new policies for stablecoin issuers.
In a report released on Wednesday, researchers and economists at the Bank for International Settlements (BIS) claimed that stablecoins have not lived up to their name. The researchers claim none of the stablecoins assessed in the report maintained “their closing prices in parity with their peg.”
Stablecoins are digital assets that are pegged to the prices of fiat currencies like the dollar or euro. Stablecoins have grown in popularity in recent years as they are widely seen as an alternative payment tool.
However, the BIS researchers wrote that “to serve as a medium of exchange, they (stablecoins) must also be able to maintain their peg during the day.” The analysts claim that most stablecoins have been unable to consistently maintain their peg thus far.
The BIS report examined prominent stablecoins such as Tether, USD Coin, Pax Gold, and others. It also made mention of Terra’s algorithmic stablecoin, UST, which crashed last year, sending shockwaves across the cryptocurrency market and causing huge damage.
The report concludes that “the lack of transparency regarding the availability and quality of these reserves may undermine trust in stablecoins’ credibility and their ability to maintain their peg.”
EBA Launches Proposals for Stablecoins
Stablecoins have been the subject of regulatory interest in several countries, including the UK. Interestingly, the European Union’s financial watchdog, the European Banking Authority (EBA), recently proposed new policies for stablecoin issuers. The guidelines set the minimum capital and liquidity criteria for stablecoin issuers.
The proposed guidelines are designed to ensure that users can easily redeem their stablecoins in the case of volatile market conditions or bank runs.
In addition, the recommended liquidity policies require stablecoin issuers to provide investors with any stablecoin backed by a fiat currency that is fully redeemable at par. The EBA claims that the recommendations will serve as a liquidity stress test for stablecoin issuers.
According to the EBA’s proposals:
The liquidity stress testing will help issuers of tokens better manage their reserve of assets and, generally, their liquidity risk. Based on the outcome of the liquidity stress testing, the EBA or, where applicable, the relevant competent authority or supervisor may decide to strengthen the liquidity requirements of the issuer.
The recommendations are scheduled to go into effect in early 2024 if they are approved.