Bank of Israel Consults on Stablecoin Regulations Before Digital Assets Push

The Bank of Israel has published a consultation paper seeking feedback on regulating stablecoins, ahead of a wider push into digital assets. Officials at the central bank emphasized that the proposals could be turned into law or serve as rules set by regulatory bodies. The group responsible for the paper is headed by Deputy Governor Andrew Abir and examined all the legal, monetary, regulatory, and technological implications of stablecoins before releasing the document.

The objective is to mitigate risks associated with stablecoins through proactive measures, such as banning algorithmic stablecoins. Algorithmic stablecoins are a type of cryptocurrency that relies on two tokens - a stablecoin and another cryptocurrency that supports it - governed by an algorithm (or smart contract).

The Bank of Israel is concerned about algorithmic stablecoins following the collapse of the Terra ecosystem when TerraUSD (UST) was de-pegged. The consultation paper also includes provisions for ensuring that reserve assets cover all of a stablecoin's liabilities. Additionally, the Bank of Israel would have oversight functions, while stablecoin issuers must permit redemption within two business days and segregate reserve assets.

The bank said it had studied European regulations, such as the Markets in Crypto Assets (MiCA) legislation, and may adopt some of its ideas to supplement local laws.