Bank of Israel Introduces A Framework To Oversee Stablecoins

The Bank of Israel is exploring the issue of digital assets and their impact on the areas it oversees, including maintaining financial stability, managing monetary policy, and regulating payment systems. The increasing interest in digital assets and the associated risks have prompted the Bank to establish a committee headed by Deputy Governor Andrew Abir to examine the issue from various perspectives, including prudential, regulatory, technological, monetary, and legal.

Regulating Stablecoin Activity in Israel

One of the key areas the committee has focused on is the regulation of stablecoin activity in Israel. A stablecoin is a digital asset that is designed to maintain its value by pegging it to the value of another asset. The issuer of the stablecoin operates a mechanism that ensures the stability of the coin's value. Unlike other digital assets, stablecoins have the potential to be used not only as an investment asset but also as a means of payment.

The Bank of Israel is responsible for regulating and supervising means of payment, and the principles document developed by the committee outlines the regulation of stablecoin activity in Israel. The aim of this regulation is to allow stablecoin activity while managing the inherent risks associated with using them and adjusting the consumer protections and prudential requirements to this unique activity.

Top Stablecoins

The regulation of stablecoins is important as they have the potential to significantly impact financial stability, monetary policy, and payment systems. Stablecoins can be used to facilitate cross-border transactions, which could have an impact on foreign exchange rates and capital flows. Additionally, stablecoins could be used for illicit activities, such as money laundering and terrorist financing, which could pose a threat to national security.

Balancing Benefits and Risks of Stablecoin Regulation in Israel

The regulation of stablecoins should be designed to balance the benefits of stablecoin activity with the potential risks. The principles document developed by the committee provides guidance on the regulation of stablecoins in Israel. The principles cover several areas, including governance and risk management, market conduct, prudential requirements, consumer protection, and technological standards.

Governance and risk management are critical aspects of stablecoin regulation. Stablecoin issuers must have appropriate governance structures in place to ensure that they operate in a safe and sound manner. Risk management practices must be robust, and issuers must have contingency plans in place to manage risks.

Market conduct is another area that needs to be regulated. Stablecoin issuers must adhere to fair market practices and ensure that they do not engage in anti-competitive behavior. Additionally, stablecoin issuers must ensure that they have appropriate controls in place to prevent market manipulation.

Prudential requirements are necessary to ensure that stablecoin issuers have sufficient capital and liquidity to withstand adverse market conditions. Prudential requirements should be proportionate to the risks associated with stablecoin activity.

Consumer protection is also a critical aspect of stablecoin regulation. Stablecoin issuers must ensure that consumers are provided with clear and accurate information about the risks associated with stablecoin activity. Additionally, stablecoin issuers must have appropriate measures in place to protect consumer funds.

Technological standards are also important in regulating stablecoin activity. Stablecoin issuers must ensure that they have appropriate security measures in place to protect against cyber threats. Additionally, stablecoin issuers must have appropriate controls in place to ensure that stablecoin transactions are conducted in a safe and secure manner.

The document proposes rules for stablecoin activity that the Bank of Israel recommends promoting through legislation or establishing as part of the regulators directives. Among other things, it is proposed:

• To establish a requirement according to which the reserve assets that will be held by a stablecoin issuer will cover 100 percent of its liabilities to the coin holders. This requirement will greatly reduce the prudential risk deriving from the activity in stablecoins.

• In terms of the identity of the regulators, it is proposed that stablecoin issuers will require licensing: for a coin that does not have systemic importance, the licensing shall be by the Capital Market Authority; otherwise the licensing shall be by the Banking Supervision Department. In the document, criteria are proposed for defining a stablecoin as having systemic importance.

• A stablecoin that is declared to be a controlled payment system shall be overseen by the payment systems oversight function at the Bank of Israel.

• In order to enhance the supervisory efficiency, it is proposed to establish coordination mechanisms among the various relevant regulators.



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