BIS Report Proposes “Embedded Supervision” for Stablecoins

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In Brief
  • A new paper by the Bank of International Settlements (BIS) calls for a supervisory requirement in stablecoin frameworks.

  • The paper cites Facebook's Libra stablecoin as an existential threat to sovereign fiat currencies.

  • It further suggests that CBDC adoption offers the best possible outcome for this oversight problem.

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A new report published by the Bank of International Settlements (BIS) has suggested the creation of an “embedded supervision” capacity within stablecoin frameworks for the benefit of regulators.

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The paper, published on Nov 24, cites the potential of Facebook’s Libra stablecoin to become a de-facto global currency. This, they say, is evidence that regulators must accept the inevitability of stablecoin adoption and find new ways to carry out their functions.

Resistance Is Futile

Written by Douglas Arner, Raphael Auer, and Jon Frost, the paper seeks effective oversight of private stablecoins, which are currently unregulated.

It mentions that no stablecoin or cryptocurrency has emerged as a viable competitor to fiat currency yet. It does, however, say that Facebook’s Libra stablecoin may, one day, existentially threaten sovereign fiat money.

An excerpt from the report reads:

“Libra does still threaten currency substitution, i.e. clients may use Libra as an alternative to the sovereign currency in a given jurisdiction, particularly those outside of major currency areas with established Libra stablecoins.”

Embedded Monitoring for Regulatory Compliance

One way around this existing problem, the BIS says, is to create an embedded capability within existing stablecoin frameworks to ensure market integrity, investor and consumer protection, or prudential supervision.

An explanation from the report reads:

“While many DLT companies have not necessarily focused on this joining of technology, regulation and supervision, it is being seen in some contexts. The automated provision of information by certain large value digital payments platforms, such as Alipay and WeChat Pay in China, provides one example.”

The paper goes on to suggest that Central Bank Digital Currencies (CBDCs) may potentially solve the oversight problem more elegantly because their issuing central banks are not “subject to the same conflicts of interest around the asset backing and stabilization mechanism.”

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David is a journalist, writer and broadcaster whose work has appeared on CNN, The Africa Report, The New Yorker Magazine and The Washington Post. His work as a satirist on 'The Other News,' Nigeria's answer to The Daily Show has featured in the New Yorker Magazine and in the Netflix documentary 'Larry Charles' Dangerous World of Comedy.' In 2018, he was nominated by the US State Department for the 2019 Edward Murrow program for journalists under the International Visitors Leadership Program (IVLP). He tweets at @DavidHundeyin

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