Today the Bank of Israel published a consultation paper regarding the regulation of stablecoins in Israel. It suggests that its proposals are enacted in legislation.
Three highlights are that algorithmic stablecoins will not be allowed, issuers may be allowed to have some central bank deposits as part of the stablecoin reserves, and Israel plans to largely adopt European regulations for supervision. That includes MiCA for stablecoin issuers and Europe’s PISA for supervising electronic payments.
Issuers have to be licensed as per MiCA. Hence the issuer must be incorporated in Israel and publish a white paper. In turn, this should describe how it operates and the fees involved. Issuers have to submit to regulatory oversight and provide consumer protections
One aspect that was slightly unclear is the central banks’ oversight of the technology infrastructure. The paper states (Google Translation), “For example, if a stable currency operates on top of the Bitcoin blockchain infrastructure, the regulator can determine that this infrastructure is not safe and must operate on a different infrastructure.” This may be a hypothetical example of the potential power of the central bank. Or it might be saying the Bitcoin network should not be used. We suspect the former.
Other proposals include:
- Stablecoins must be 100% collateralized in the same fiat currency or the same mix for a basket currency.
- Reserve assets should be held in short term government bonds and Bank of Israel deposits, with details to be decided.
- Reserve assets must be segregated.
- Customers have direct rights to collateral in the event of insolvency.
- Redemption must be possible within two business days, and payment by the following Monday.
- The stablecoin issuer can earn interest.
Meanwhile, this month’s big stablecoin news is the end of the Binance USD (BUSD) stablecoin as issuer Paxos ended its deal with Binance. But Paxos also might be sued by the SEC over BUSD. And the Financial Stability Board is working on its final stablecoin proposals and says most current stablecoins won’t meet its criteria.
