Basel Committee Proposes Rigorous Standards for Stablecoins in Banking Sector

A set of 11 guidelines designed to control stablecoins and set them apart from more volatile cryptocurrencies like Bitcoin has been released by the Basel Committee for Banking Supervision. Stablecoins would be categorized as Group 1b assets under the plan, which would mean they are less risky than unbacked digital assets. The requirements include minimal volatility, short maturities, and excellent credit quality of reserve assets.

The Basel Committee for Banking Supervision (BCBS) has published a consulting paper with extensive rules intended to classify stablecoins and provide legal requirements for their use in the banking industry. The suggested standards are a component of the committee’s larger plan to handle and control the risks related to digital assets in the banking sector.

Group 1b Classification and Capital Requirements

Stablecoins meeting the specified standards would be classified as Group 1b assets, enjoying a lower risk designation compared to more volatile digital assets. This distinction is significant as cryptocurrencies like Bitcoin face a higher risk weight of 1,250%, necessitating banks to hold capital equivalent to their exposure. Stablecoins with effective stabilization mechanisms may receive preferential treatment under Group 1b, subject to capital requirements based on the risk weights of their underlying exposures, aligning with the existing Basel Framework.

To qualify for the Group 1b regulatory treatment, stablecoins must adhere to specific criteria, including the requirement to be consistently redeemable. Only stablecoins issued by regulated entities with robust redemption rights and governance structures would be eligible for this favorable treatment. Stablecoins unable to meet these criteria would fall into Group 2, subject to a more conservative capital treatment.

The BCBS emphasizes the importance of high credit quality for reserve assets backing stablecoins to minimize credit risk. Additionally, these assets must be shielded from the bankruptcy risks associated with parties involved in the stablecoin’s operations.

This regulatory development aligns with the global trend of addressing the unique challenges posed by digital assets in traditional financial frameworks. It comes at a time when rating agencies, including S&P Global, are introducing stability assessments for stablecoins, evaluating their ability to maintain a peg to underlying assets.