While Crypto Regulations Are Still Unknown, Bank Regulators Publish Their Guidelines

While Crypto Regulations Are Still Unknown, Bank Regulators Publish Their Guidelines

7 January 2023

It might be many months before US lawmakers make any headway in establishing criteria for stablecoins – tokens whose value is normally fixed to the US dollar. In the meantime, bank authorities have made it obvious who they believe should be the winners.

Their verdict is terrible news for Tether, the market’s largest stablecoin.

The Basel Committee on Banking Supervision, an international standard-setter for bank regulators, presented its newest draft of recommendations for how banks should treat crypto assets when calculating capital and other factors last week.

Unsurprisingly, the committee advocated the most demanding treatment for volatile tokens like Bitcoin, recommending that banks normally maintain such coins below 1% of their core capital.

However, the regulations are more interesting for stablecoins, which have a market value of $140.6 billion and are most commonly utilized as a holding place for crypto investors between trades.

Regarding bank capital norms, the Basel committee’s proposal will place algorithmic stablecoins, which are not backed by any assets, in the same category as Bitcoin and other volatile tokens.

However, traditional stablecoin rules are more complicated. Such currencies, which account for the majority of the stablecoin market, are essentially digital claims on assets owned by the coin issuer. Token holders can purchase and sell the coins on the open market, but they can also redeem them with the issuer for traditional currency transferred to a bank account. In principle, that makes it so that a stablecoin’s value should not deviate from a dollar.

Unlike the other coins, Tether retains around 17% of its reserves in assets that are volatile or have some credit risk, such as secured loans, precious metals, and even other digital tokens. The riskier asset mix helps the corporation profit more from USDT, the world’s largest at over $66 billion in market value. 

Tether has been criticized by short sellers and other competitors for holding risky assets and failing to provide more information about its reserves, and this year the price of USDT has momentarily fallen below its peg to the dollar on several exchanges.

A Tether spokesman responded to a request for comment on the company’s latest reserve certification, which was released in November.

“Tether is the most used stablecoin on the market,” said Tether chief technology officer Paolo Ardoino in a statement accompanying the report, who described Tether as a “leader in transparency.”

And as more banks begin to serve the crypto sector, stablecoin issuers will most likely go to extraordinary lengths to guarantee their currencies match bank regulations.

According to the Fitch researchers, the new requirements will likely push stablecoin issuers to strengthen their transparency, risk management, and governance standards in order to comply with the new laws.

And even if US lawmakers are hesitant to approve the legislation, it is obvious where authorities want stablecoins to move in.

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