The Monetary Authority of Singapore (MAS) has published a consultation about its implementation of the Basel banking rules relating to crypto-assets. Most of its consultation questions are around stablecoins, which is unsurprising as several major stablecoin issuers have Singapore licenses, including Circle. It’s also the home to the Paxos Global Dollar stablecoin.
On the face of it, the Singapore proposals appear to take a more positive view of permissionless blockchains than the Basel Committee, which currently treats them as high risk. The fact that Singapore is consulting regarding stablecoins, implies the high risk classification might be relaxed. More on that later.
The specific consultation questions were entirely around stablecoins. MAS proposes qualifying reserves as including low risk securities issued by governments or multilateral bodies (like the World Bank), central bank reserves, bank deposits or reverse repo. It goes into some details about the ratings of the securities and asks for feedback.
It also proposes that the weighted average maturity of all reserves should have a limit of three months. Then it discusses repo.
Stablecoins and repos
Just a reminder that reverse repurchase agreements (reverse repo) involve the stablecoin issuer depositing its cash with an institution in return for high quality securities as collateral. Usually the deal unwinds the following day with the stablecoin company getting its cash back and then repeating the process the following evening. In the case of Circle’s USDC, this makes up the vast majority of reserves.
While most stablecoins use reverse repo, very few use repo. Repo involves the issuer depositing securities with an institution and receiving cash. This is a potential alternative to bank balances. The Basel rules sort of prohibit repo and collateral swaps, but says national regulators can allow them if they can put sufficient safeguards in place.
The primary concerns are twofold. There’s potential for reserve assets to be double counted if they include both the securities and the cash. MAS proposes to ban double counting.
Using repo, a stablecoin issuer could have low quality collateral and turn it into cash, disguising the asset quality (likewise for collateral swaps). Hence, MAS is looking for industry proposals about how to address these risks.
As we noted before, all of this is rather moot unless permissionless blockchains are considered less risky than the current Basel view.
Stablecoins and permissionless blockchains
The Basel Committee suggests a favorable risk treatment for tokenized securities and stablecoins (Group 1), but only if they are ‘qualifying’ which currently means issued on permissioned blockchains. Non qualifying tokenized assets and other cryptocurrencies are treated as very high risk for banks, making them expensive to hold.
So if permissionless blockchains are a no-no, that pretty much rules out stablecoins being held by banks. However, the Basel Committee has said it may review its position. Given the rules come into force in January, time is running out. Perhaps MAS knows something.
The Basel rules have two clauses that touch on the permissionless topic. One discusses permissionless ledgers, stating the validation has higher risks, although it doesn’t expressly rule them out. Instead, the Basel Committee provided a separate opinion that the risks are currently too high. So for things to change, the Committee could just render a different view.
We didn’t find any explicit mention of permissionless blockchains in the MAS document, although there is a general clause about the network that has a broad wording that “all key elements of the network on which the cryptoasset operates are well-defined such that all transactions and participants are traceable.” It also briefly touches on the consensus mechanism, but it’s not prescriptive.
A second Basel clause implies a permissioned blockchain for both tokenized securities and stablecoins, because it requires all node operators to be regulated entities or “subject to appropriate risk management standards”. The Basel document refers to regulated entities as including “operators of the transfer and settlement systems for the cryptoasset, wallet providers” and stablecoin issuers and their custodians.
MAS pretty much implements this clause, so it comes down to the node validators being “subject to appropriate risk management standards”. That’s an interesting one for permissionless blockchain.
MAS clause proposal
9A.2.22 For a cryptoasset to meet classification condition 4, a Reporting Bank must satisfy itself that all entities that execute redemptions or transfers, provide storage, execute settlement of the cryptoasset or manage the reserve assets of the cryptoasset meet all of the following conditions:
(a) node validators must be regulated and supervised, or subject to appropriate risk management standards;
(b) all entities falling within the scope of this paragraph, with the exception of node validators, must be regulated and supervised;
(c) all entities falling within the scope of this paragraph must have in place a comprehensive governance framework, which must include an accountability and reporting structure and risk control policies and practices for the activities associated with the functions of the cryptoasset, and the governance framework must be publicly disclosed.
9A.2.23 To avoid doubt, the entities falling within the scope of paragraph 9A.2.22 include –
(a) operators of the transfer and settlement systems for the cryptoasset;
(b) providers of wallets for the storage of the cryptoasset; and
(c) for cryptoassets with stabilisation mechanisms, administrators of the stabilisation mechanism and custodians of the reserve assets of the cryptoasset.
Stepping back, there’s also a geopolitical element at play here. With the Trump administration throwing out the rulebook in many arenas, to what extent will it forge its own path with the Basel rules?
