Israel's Central Bank Proposes Rules for Stablecoins Including 100% Reserve Requirement

The Bank of Israel on Wednesday published principles for regulating stablecoin activity in the country, which lays out the central bank's recommendations for supervising crypto linked to the value of other assets like the U.S. dollar.

The document follows the publication of guidelines for digital asset regulation from the country's Ministry of Finance in November. The goal of the central bank's proposed regulations is to allow stablecoin use in the country "while managing the risk inherent in using them, and adjusting the consumer protections and prudential requirements," the document said.

Although the document refers to the collapse of algorithmic stablecoin terraUSD in May as a motivation for establishing regulations, the recommendations only target stablecoins attached to other assets and backed by collateral, not algorithms. The central bank said algorithmic stablecoins like terraUSD are not used widely for payments, but indicated it may prohibit them if they become too popular.

"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.

The central bank recommends requiring stablecoin issuers to maintain reserves matching the amount of crypto in circulation, covering "100 percent of its liabilities to the coin holders." The recommendation aligns with that of other jurisdictions like Hong Kong, which plans to regulate asset-backed stablecoins by June this year.

The recommendations include splitting supervisory roles between multiple regulators to enhance efficiency. The central bank proposes that stablecoins issuers should be required to obtain licenses to operate. It adds that issuers of larger stablecoins that could have "systemic importance" should be licensed by the Banking Supervision Department while others should be supervised by the Capital Market Authority.

Payments-focused stablecoins "shall be overseen by the payment systems oversight function at the Bank of Israel," according to the document.

The proposed rules are open to public comment until March 15, after which the bank will make required changes and recommend legislation to the government.

Read more: Israel’s Ministry of Finance Proposes New Guidelines for Regulating Digital Assets

Update (Feb. 22, 2023 14:36): Adds more detail on algorithmic stablecoins in third paragraph.