• Basel Committee proposes maturity limits for stablecoin reserve assets.
• Overcollateralization required for longer-term assets to ensure stability.
• Credit quality criteria defined for reserve assets to bolster stablecoin stability.

In a move to enhance the stability of stablecoins, the Basel Committee on Banking Supervision, part of the Bank for International Settlements (BIS), has recommended targeted adjustments to its standards on banks’ exposure to crypto assets.

The proposed measures, outlined in a consultative document released on Dec. 14, 2023, focus on refining prudential standards for stablecoin exposure, building on the committee’s initial standards published in December 2022.

Addressing redemption risks with maturity limits

The committee’s first proposal centres on mitigating redemption risks during periods of extreme stress, where stablecoin issuers might face mass withdrawal claims, leading to fire sales. To address this, the committee suggests imposing a maximum maturity limit for individual reserve assets. This measure aims to restrict stablecoin exposures to longer-term maturities, potentially safeguarding against abrupt and large-scale withdrawal demands.

If longer-term assets are allowed, the committee emphasizes the necessity for over-collateralization. This means that such assets must exceed the claims of stablecoin holders, providing a buffer against potential declines in asset values. This ensures that stablecoins remain redeemable at their pegged value, even in challenging market conditions.

Credit quality criteria for stability

The second proposal focuses on establishing criteria for credit quality concerning reserve assets. The committee suggests a list of reserve assets suitable for stablecoin issuers, including central bank reserves, marketable securities guaranteed by sovereigns and high-credit-quality central banks, and deposits at banks with a high credit rating.

By specifying assets with high credit quality, the committee aims to bolster the stability of stablecoins, reinforcing their ability to maintain value, particularly in volatile market conditions.

The Basel Committee invites comments on these proposed amendments until March 28, 2024. Whether amended or not, the prudential standards for stablecoin exposures are slated for implementation on January 1, 2025.

These recommendations reflect the ongoing efforts of global regulatory bodies to address potential risks associated with stablecoins and fortify the resilience of the financial system in the rapidly evolving landscape of crypto assets.