Concerns are mounting among top central bankers worldwide as efforts to develop global stablecoin regulations have sharply slowed over the past year. Experts warn this regulatory pause could fragment the market and amplify financial risks due to gaps in oversight.
Lack of oversight raises new risks
Bank of England Governor Andrew Bailey told Reuters that progress on setting international rules for stablecoins by the Financial Stability Board has recently ground to a halt. Pablo Hernández de Cos, General Manager of the Bank for International Settlements (BIS), underscored during a recent speech in Japan that this slowdown carries serious risks for the financial system.
According to de Cos, establishing global consistency is essential for bringing regulations under a single framework, rather than implementing them piecemeal across jurisdictions. Otherwise, he warned, companies could exploit weak regulations in certain countries, further deepening enforcement gaps.
Pablo Hernández de Cos stated that fragmented regulation worldwide could split markets and lead to increased risks.
This climate of uncertainty is being exacerbated as major economies move ahead with their own regulatory approaches. Differences in national policies and timelines make full global alignment increasingly difficult to achieve.
Rapid expansion in stablecoin market
The stablecoin sector has witnessed remarkable growth in recent years. Latest data from DeFiLlama sets the total market capitalization at $320 billion, with USDT by Tether and USDC by Circle making up the majority share.
De Cos also argued that some stablecoin structures often resemble securities more than cash, and do not trade like cash equivalents. He highlighted that delays and complications in redemption processes could pull stablecoin values away from their targeted $1 peg.
Sharp investor withdrawals could trigger cascading effects throughout financial markets. To manage these risks, experts have proposed limiting interest payments on stablecoins and exploring measures like offering issuers access to central bank lending or deposit insurance-style protections.
Key legislative moves from the US
Policymakers say these kinds of safeguards could make the stablecoin market safer, while preserving its role in digital payments.
In the United States, steps are being taken to pass the Digital Asset Market Structure Transparency Act. After clearing the House of Representatives last year, the proposal is now under Senate review, with Banking Committee Chair Tim Scott and Agriculture Committee Chair John Boozman leading the process.
Senators Thom Tillis and Angela Alsobrooks reached an agreement on stablecoin yields, paving the way for continued negotiations. Senator Cynthia Lummis, who chairs the Subcommittee on Digital Assets within the Banking Committee, indicated that a dedicated hearing on the bill is likely during the second half of this year.
However, outstanding questions around oversight and ethical frameworks for decentralized finance (DeFi) must be answered before final consensus can be reached.
