Today, the Bank of Israel published a consultation paper on the regulation of stablecoins in Israel. He suggests that his proposals be enacted into legislation.

Three highlights are that algorithmic stablecoins will not be allowed, issuers may hold some central bank deposits as part of stablecoin reserves, and Israel plans to largely adopt European regulations for supervision. That includes MiCA for stablecoin issuers and Europe’s PISA for monitoring electronic payments.

Issuers must be licensed under MiCA. Therefore, the issuer must be incorporated in Israel and publish a white paper. In turn, this should describe how it operates and the fees involved. Issuers must submit to regulatory oversight and provide consumer protection

One aspect that was not clear is the supervision of the technological infrastructure by central banks. The document states (Google translation): “For example, if a stablecoin operates on top of the Bitcoin blockchain infrastructure, the regulator may determine that this infrastructure is not secure and must operate on a different infrastructure.” This may be a hypothetical example of the potential power of the central bank. Or it could be saying that the Bitcoin network should not be used. We suspect the former.

Other proposals include:

• Stablecoins must be 100% guaranteed in the same fiat currency or in the same combination for a basket of currencies.
• Reserve assets are to be held in short-term government bonds and Bank of Israel deposits, with details to be decided.
• Reserve assets must be segregated.
• Customers have a direct right to the guarantee in case of insolvency.
• Redemption must be possible within two business days and payment before the following Monday.
• The issuer of the stablecoin can earn interest.

Meanwhile, the big stablecoin news this month is the end of the Binance USD (BUSD) stablecoin as issuer Paxos ended its deal with Binance. But Paxos could also be sued by the SEC over BUSD. And the Financial Stability Board is working on its final stablecoin proposals and says that most current stablecoins will not meet its criteria.