Singapore, Japan review stablecoin rules; BIS probes its credibility

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Stablecoins under scrutiny again this week as Singapore’s top finance regulator tightens rules, including around yield, and Japan’s seeks to loosen tax reporting requirements. Meanwhile, the head of the Bank for International Settlements (BIS) reaffirmed the institution’s concerns around the booming sector, which in turn compelled Tether’s CEO to jump to its defense.

• BIS challenges stablecoins, favors tokenized deposits
• Singapore strengthens stablecoin rules, limits interest
• Japan regulator seeks stablecoin tax filing exemption

BIS against stablecoins, for tokenized deposits

The head of the Bank for International Settlements—an international financial institution focused on fostering monetary and financial cooperation while also serving as a bank for central banks—has doubled down on the institution’s criticism of stablecoins, arguing that they do not credibly function as a means of payment at scale, while pointing to tokenized bank deposits as a better alternative.

In an August 28 speech at the Jackson Hole Economic Symposium in Kansas City, BIS General Manager Pablo Hernández de Cos said there were three key areas in which stablecoins currently lacked: “singleness,” “interoperability,” and “financial integrity,” according to a Reuters report last Friday.

The BIS sees singleness of money—the economic principle that all forms of money within a currency area must exchange at equal face value, or par—as a problem for stablecoins because their value may deviate in secondary markets; interoperability an issue as the stablecoin sector is fragmented across multiple often-incompatible blockchains; and financial integrity a problem as evidence suggested that most stablecoin balances are held in self-custodied wallets, outside of traditional monitoring.

The BIS Chief’s comments come a couple of months after the institution published its annual report, in which it cited similar concerns about the widespread adoption of stablecoins as money.

This time, though, de Cos offered up an alternative, arguing that tokenized bank deposits were a more promising base for the monetary system of the future.

“Tokenized deposits offer a more direct path to harness tokenization while preserving the monetary system’s foundations,” he said.

Beyond stablecoins’ supposed unsuitability as a means of mass payment, the BIS Chief also warned of the macro-economic risks to the banking sector if stablecoins were adopted at scale. Specifically, banks could see their funding costs increase as deposits shift away from them—especially if stablecoin holdings were allowed to accrue yield—and stablecoin issuers could also face “run risk” for which they are unprepared.

In light of the BIS doubling down on its critique of stablecoins, one of the industry’s leading figures felt the need to defend the asset class.

On August 30, Paolo Ardoino, CEO of Tether—the company behind the world’s largest stablecoin by market cap, USDT—took to X to state that the BIS was right to be worried about stablecoins, but not because of the flaws inherent in the asset class, rather the flaws it exposes in traditional banking.

“BIS is rightfully worried about the fact that stablecoins are exposing the emperor without clothes,” wrote Ardoino. “Why someone should choose to put his savings into a fractional reserve product while stablecoins are fully reserved?”

He argued that stablecoins—presumably referring principally to USDT—are instruments that are 100% reserved by liquid assets, such as treasuries. In contrast, Ardoino said that  tokenized bank deposits are a “pinky swear uninsured bank deposits (usually only 10% reserved by liquid assets).”

Fortunately for the international banking institution, it appears many national authorities share their concerns. In the United States, the passage of the GENIUS Act last July explicitly prohibited issuers from paying interest or yield (in cash, tokens, or other consideration) solely for holding, using, or retaining a payment stablecoin. The country’s long-delayed digital asset market structure bill, the CLARITY Act, would also ban passive, savings-account-style interest on stablecoin balances—although the bill is still being debated in Congress and subject to change, or failure.

More recently, on September 1, the Monetary Authority of Singapore (MAS) proposed new stablecoin rules that also include interest restrictions.

Singapore tightens rules and restricts interest

MAS published a consultation paper on proposed legislative amendments to implement its regulatory framework for stablecoins in Singapore, which was finalized in August 2023 and applies to single-currency-pegged stablecoins issued in the city-state and pegged to the Singapore dollar or G10 currencies.

The consultation paper asks for feedback on the proposed legislative amendments to implement the framework, as well as on several policy positions that take into account international developments and best practices in stablecoin regulation since the framework was finalized in 2023.

Under the regulator’s current stablecoin framework, issuers must obtain a MAS license, maintain reserve assets sufficient to cover outstanding tokens, meet capital/liquidity requirements, provide timely redemptions, and publish disclosures on reserves and audits.

However, the newly proposed additions would broaden and strengthen requirements, including a prohibition on paying interest on MAS-regulated stablecoins, a requirement for stress testing, and the need to have plans in place for the recovery and orderly wind-down of MAS-regulated stablecoin issuers.

MAS is also proposing to allow stablecoins that are jointly issued by a Singapore and foreign issuer to be regulated under the framework and labelled as “MAS-regulated stablecoins,” provided that risks are sufficiently mitigated; a recognition of cross-border wholesale use cases of stablecoins and a limited number of foreign-issued stablecoins regulated under a comparable foreign regulatory framework; and to impose safeguards similar to those applicable to existing Payment Services Act licensees, including the requirement to safeguard customer’s monies received before the stablecoins have been issued.

“MAS’ proposed legislative amendments will give effect to a stablecoin framework that promotes responsible financial innovation,” Ho Hern Shin, MAS Deputy Managing Director (Financial Supervision), said on Tuesday. “The framework will provide clear regulatory guardrails for stablecoins that meet high standards of value stability and governance.

She added that “this is important as asset tokenisation gains traction. Trusted and well-regulated stablecoins can serve as a credible settlement asset in tokenised financial markets, while mitigating risks to users and the broader financial system.”

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Japanese regulator requests tax filing exemption

While MAS focuses on updating its stablecoin framework, Japan’s Financial Services Agency (FSA)—the primary government regulator that oversees the country’s banking, insurance, and securities sectors—submitted a request to exempt so-called “trust-type stablecoins” from mandatory tax filings, starting in fiscal year 2027.

Trust-type stablecoins are digital tokens fully backed by reserve assets held securely inside a legal trust structure, allowing users to redeem the tokens at par value with a traditional fiat currency.

Based on this structure, they are currently subject to the same rules as other trusts in Japan under inheritance tax law, including requirements to submit beneficiary-by-beneficiary trust reports and calculation statements that include beneficiaries’ names and income. Similarly, under the country’s income tax law, the trustee must submit statements such as the “trust account statement,” which lists the names of the beneficiaries and the income and expenses attributable to the trust property.

However, as part of its tax-reform request for the new fiscal year, issued on August 31, the FSA argued that it would be impractical to apply the same rules to trust-type stablecoins, due to their expected wide circulation among a large number of users as a form of payment—meaning, trustees cannot reliably know the names of the holders. In addition, users cannot receive income from holding the stablecoins.

Thus, the regulator suggested measures such as making it unnecessary to submit the “Beneficiary-Specific Statement for Trusts” under the Inheritance Tax Act and the “Trust Calculation Statement” under the Income Tax Act when there are changes to beneficiaries.

Japan’s parliament recently passed revisions to classify digital assets as financial assets, moving the main regulatory framework for crypto-assets from the Payment Services Act to the Financial Instruments and Exchange Act.

The reforms—passed by parliament on July 15—introduced securities-style regulation, including enhanced disclosure and business conduct requirements, and new crypto-asset insider trading rules, and required crypto businesses operating in Japan to meet additional compliance requirements to improve market integrity and protect their customers.

The new framework also introduced rules against insider trading and improved oversight for digital currency businesses.

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