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The Bank of Israel portrayed its devotion to ensuring compliance from crypto operators. The bank’s proposals conveyed via its February 22 publication recommend the prohibition of algorithmic stablecoins in the event they become widely utilized for payments.

Harmonizing Supervision of Value-references Crypto Assets

The publication outlines the principles to implement when regulating the stablecoin activity in Israel. Besides principles, the publication outlines the central bank’s suggestions to harmonize the supervision of value-referenced crypto assets (VRCA) linked to fiat currencies such as the US dollar.

The bank’s proposals refer to the guidelines issued by the Ministry of Finance in November 2022 regarding digital asset regulation. The central bank seeks to facilitate the adoption of a stablecoin in Israel while resolving the risk inherent in their use. The publication illustrates the need to adjust for consumer protections and enforce prudential requirements.

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Prohibit Algorithmic-backed Stablecoins if Popular in Settling Payments

The publication refers to the downfall of the algorithmic-based TerraUSD stablecoin in May 2022 as the basis for enforcing regulations. Nevertheless, the document emphasizes the current suggestions focus on stablecoins linked to other assets and collateralized rather than algorithms. The central banks illustrated that algorithmic-backed stablecoins such as terraUSD are rarely utilized to settle payments. However, their increased popularity in payments may prompt their prohibition.

The bank’s publication proposes that the likelihood of algorithmic stablecoins becoming common payment means would oblige issuers to hold full collateral. The document indicated that issuing the bearer currency reliant on algorithmic stabilizers would remain prohibited.

Proposals Oblige Stablecoin Issuers to Match Reserves to Circulating Cryptos

The Bank of Israel obliges stablecoin issuers to match reserves with circulating cryptos. The bank considers it prudent for stablecoin issuers to offer 100% coverage for the coin holders’ liabilities. The suggestion mirrors the stance adopted in Hong Kong, obliging all operators to comply with the asset-backed stablecoins by June 2023.

The Bank of Israel proposes the need for a division of labour by splitting supervisory roles among the regulators involved to enhance oversight in the crypto industry. It decries the existence of crypto operators offering unregistered securities. As such, the central bank suggests that stablecoin issuers obtain licensure for their operations.

Identified Oversight Role Relative to the Stablecoins’ Nature and Use

The bank’s proposals consider it critical for the larger stablecoins capable of systemic influence to seek operating licenses from the Banking Supervision Department. The document added that other stablecoins issuers should seek approval from the Capital Market Authority.

Wednesday’s publication suggests that the Bank of Israel assumes the oversight role of all payment-oriented stablecoins. However, the publication invites the public to review the principles and provisions proposed by March 15. The lapse in the timeline will enable the central bank to incorporate the changes before recommending legislation to the Israeli government.

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Michael Scott

By Michael Scott

Michael Scott is a skilled and seasoned news writer with a talent for crafting compelling stories. He is known for his attention to detail, clarity of expression, and ability to engage his readers with his writing.