Stablecoins have crossed $300 billion in market value. Here’s why BIS analysis suggests regulators may need group-wide rules to manage stablecoin risks.
New Delhi: Stablecoins have emerged as a critical link between the cryptocurrency ecosystem and traditional financial markets, but their growing importance is also exposing gaps in existing regulatory frameworks.
Unlike volatile crypto assets such as Bitcoin, stablecoins are designed to maintain a relatively stable value by being linked to traditional currencies, particularly the US dollar. Their stability has helped them gain traction for cross-border transfers and, increasingly, everyday payments in some markets.
The global stablecoin market has now surpassed $300 billion, although it remains heavily concentrated. Two major issuers account for around 90% of the market’s total value, increasing the importance of effective oversight as stablecoin adoption expands.
Governments and regulators worldwide are therefore developing frameworks covering the issuance, trading and redemption of stablecoins. However, a recent paper from the Bank for International Settlements (BIS) highlights a key regulatory challenge: while authorities broadly agree that stablecoins require oversight, they differ significantly over who should be allowed to issue them and what activities issuers should be permitted to undertake.
Stablecoin Issuers Face Different Rules
Most regulatory frameworks limit stablecoin issuers to core functions such as issuing tokens, redeeming them and managing the reserves backing those tokens.
Issuers are generally expected to maintain high-quality and relatively safe reserve assets against the stablecoins in circulation. The objective is straightforward: users should be able to redeem their stablecoins at their stated value when required.
However, the regulatory treatment of stablecoin issuers can differ depending on whether the issuer is a bank or a non-bank financial company.
Banks are often permitted to conduct a broader range of financial activities, including lending and trading. This flexibility reflects the fact that banks and their wider corporate groups are already subject to extensive prudential supervision.
Non-bank stablecoin issuers, by contrast, typically face stricter limitations. Regulators may restrict them from activities such as crypto lending or providing custody services to third parties.
The underlying objective is to separate stablecoin issuance from activities that could expose the issuer to additional financial risks.
The Regulatory Gap Within Corporate Groups
The BIS analysis, however, raises an important question: What happens when regulators supervise only the stablecoin-issuing company rather than the wider corporate group?
This distinction could create a significant regulatory loophole.
A company could theoretically establish a separate sister or affiliated entity to conduct activities that are prohibited for the stablecoin issuer itself. Although the stablecoin issuer would technically comply with the rules, the wider corporate group could still accumulate risks through its related entities.
The problem is that those risks may not remain isolated.
If a related company experiences significant losses, confidence in the entire corporate group could deteriorate. Stablecoin users may respond by rapidly redeeming their tokens.
Such a redemption rush could force the stablecoin issuer to liquidate reserve assets quickly to meet customer demands. If the issuer cannot meet redemptions smoothly, the resulting stress could spread beyond the company and potentially affect broader financial and crypto markets.
Why Group-Wide Oversight Could Matter
The central lesson from the BIS analysis is that supervising only the legal entity that issues a stablecoin may not always be sufficient.
For non-bank issuers in particular, regulators may need to consider the activities and risks of the entire corporate group.
One possible approach would be to limit the activities of the entire group to a defined set of permitted businesses. Another option would be to require regulatory approval before an affiliated company enters additional financial or digital-asset activities.
Under such a framework, regulators could assess each activity separately and apply appropriate prudential requirements.
Cross-border coordination would also be essential. Stablecoin businesses can operate across multiple jurisdictions, meaning risks can move between countries faster than traditional financial institutions.
What It Could Mean for India
The debate has particular significance for India as policymakers continue to shape the country’s regulatory approach to virtual digital assets.
Digital assets are inherently borderless. Stablecoins issued or used outside India can still influence Indian users, businesses and financial markets.
This makes it important for Indian regulators to consider not only the risks directly associated with a stablecoin issuer but also risks arising from companies that belong to the same corporate group.
A framework focused exclusively on the issuing entity could potentially leave room for companies to shift higher-risk activities to affiliated businesses.
A group-wide regulatory approach could help address this weakness from the beginning. Such a framework could provide greater clarity for responsible digital-asset businesses while reducing the possibility that risks accumulate outside the perimeter of direct supervision.
Stablecoins Need More Than Issuer-Level Oversight
Stablecoins are designed to bring stability to an otherwise volatile digital-asset ecosystem. But their stability ultimately depends on more than the token itself.
The financial health, governance and activities of the businesses surrounding a stablecoin issuer can also influence user confidence and redemption risks.
As stablecoins become more deeply integrated into global payments and financial markets, regulators may therefore need to look beyond the issuing company.
The biggest risk may not always sit inside the stablecoin issuer. Sometimes, it can sit within the corporate group surrounding it.
