Global regulator tightens stablecoin standards for top rankings

The Basel Committee for Banking Supervision has proposed new criteria for stablecoins, aiming to differentiate them from more volatile cryptocurrencies like Bitcoin.

A consultative document released on Thursday outlines 11 standards that stablecoins must meet to be classified as Group 1b assets, considered lower risk than unbacked digital assets.

The standards ensure that the reserve assets backing stablecoins are of high credit quality, have short-term maturities, and exhibit low volatility. This move is part of the committee’s broader efforts to manage the risks associated with digital assets in the banking sector.

Cryptocurrencies like Bitcoin (BTC) are subject to the highest risk weight of 1,250%, requiring banks to hold capital equivalent to their exposure. However, stablecoins with effective stabilization mechanisms may receive preferential Group 1b regulatory treatment. This means they are subject to capital requirements based on the risk weights of their underlying exposures, as outlined in the existing Basel Framework.

For a stablecoin to qualify for this treatment, it must always be redeemable, ensuring that only those issued by regulated entities with robust redemption rights and governance are eligible. Stablecoins failing to meet these criteria fall under group two, facing a more conservative capital treatment.

The BCBS emphasizes the need for stablecoin reserves to be invested in assets with high credit quality to minimize credit risk, and those assets must also be shielded from bankruptcy risks of parties involved in the stablecoin’s operations.

This development comes as global rating agency S&P Global introduced a stability assessment for stablecoins, ranging from one at the strongest to five being the weakest, assessing their ability to maintain their peg to underlying assets.