Israel’s Central Bank set to launch new rules for stablecoins

On Wednesday, the Bank of Israel published principles that would guide the operation of stablecoins in the country. The central bank’s recommendations for supervising crypto with values pegged to assets such as traditional currencies are outlined in these principles.

In November, Israel’s Ministry of Finance published guidelines for digital asset regulation. This latest announcement emerges as a follow-up to the aforementioned move by the Ministry of Finance.

In the past few weeks, the events in the stablecoin ecosystem, particularly the SEC’s allegations against BUSD, have sent many into a tailspin. To ensure the risks attached to stablecoins are tamed appropriately, the largest bank in Israel has proposed regulations that will allow the use of stablecoin in the country “while managing the inherent risk inherent in using them and adjusting the consumer protections and prudential requirements,” as reported in the document.

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Alluding to the collapse of stablecoin TerraUSD in May 2022 as the nudge that led to the establishment of these rules, the rules are specifically targeted at stablecoins pegged against other fixed assets and supported by collateral, not algorithms.

Because algorithmic stablecoins such as TerraUSD are not widely used for payments, the central bank has stated that it may ban them if they gain popularity. 

“If nevertheless, this type of currency becomes a common means of payment, issuers will be required to hold full collateral, and in fact, the issuance of a bearer currency that uses an algorithmic stabilization mechanism will be prohibited,” the document said in Hebrew.

More details about Israel’s Central Bank rules for stablecoins 

On the website, the post explains that “by force of its functions to maintain financial stability, to manage the monetary policy, and to regulate the payment systems in Israel, the Bank of Israel is examining the issue of activity in digital assets and their impact on the areas under the Bank’s purview.”

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Instead of exposing the country’s stablecoin users to the perceived risks, the Bank of Israel is introducing rules to keep citizens safe. In addition, it recommends necessitating stablecoin issuers to maintain reserves equivalent to the amount of crypto in circulation, covering “100 percent of its liabilities to the coin holders.

The recommendation, as reported, fits well with policies enacted in other jurisdictions like Hong Kong.

Hong Kong is working tirelessly towards regulating asset-backed stablecoins by June this year. Coindesk reported Hong Kong’s stablecoin regulations: “Hong Kong is set to demand mandatory licensing for stablecoin issuers and won’t allow algorithmic stablecoins, its top financial regulator said on Tuesday.” Entities conducting regulated activity in Hong Kong will have to obtain a license to operate stablecoin services.

Also, the recommendations include dividing supervisory functions between numerous regulators to enable efficiency. It further states that some stablecoin issuers should be under the Capital Market Authority’s supervision. In contrast, the Banking Supervision Department should regulate others if they own larger stablecoins that may have “systemic importance.”

According to the statement, stablecoins primarily used for payments “must be overseen by the Bank of Israel’s payment systems monitoring division.”

The proposed regulations are available for public discussion until March 15; following that date, the bank will make any necessary adjustments and suggest legislation to the government. The regulations are mere proposals. Referencing the clarifications and qualifications section on the website, the first rule says:

This document is intended to present regulation principles to receive comments from the public. This principles document should not be seen as obligating the Bank of Israel and should not be relied upon when carrying out any stablecoin activity. The principles listed in this document have not yet been approved in legislative processes and do not necessarily reflect the legal status of the document’s publication date.