The Bank of Israel has released a consultation paper that includes a plan to regulate stablecoins before a full-scale digital asset push. Representatives from the central bank highlighted that the paper’s suggestions might end up codified into law or operate as rules issued by regulatory agencies.

The committee behind the document is led by Deputy Governor Andrew Abir, and it considered all the legal, monetary, regulatory, and technological implications of stablecoins before releasing the document. The goal is to minimise the risks associated with stablecoins through proactive measures such as the prohibition of algorithmic stablecoins. Algorithmic stablecoins represent a type of crypto asset that relies on two types of tokens, namely a stablecoin and another crypto asset that supports it.

This means that the algorithm (or smart contract) governs the relationship between them. The Bank of Israel’s concern regarding algorithmic stablecoins comes from the de-pegging of TerraUSD (UST), a move that led to the collapse of the Terra ecosystem. The consultation paper also includes references to ensure that reserved assets will cover 100% of a stablecoin’s liabilities.

Furthermore, the Bank of Israel would receive oversight functions. As for stablecoin issuers, they will be expected to allow redemption within two business days and segregate reserve assets. The bank revealed that it has analysed European regulations such as the Markets in Crypto Assets (MiCA) legislation and that it might adopt some of its concepts in order to supplement local laws.

Stablecoins are in the spotlight In February 2023, US-based Paxos has announced that it will end its partnership with cryptocurrency exchange Binance and will halt the minting of BUSD. The company motivated its decision in the context of its troubles with the Securities and Exchange Commission and the New York Department of Financial Services, which instructed it to stop creating the token. Paxos officials cited by Yahoo expressed that the company continues to maintain a strong regulatory capital in order to protect its customers and that its corporate balance sheet is able to support its business goals in the long run.

They also revealed that, even though they will no longer be partners with Binance, this will not affect their ability to continue serving new or existing clients. According to coingeek. com, the SEC is investigating Paxos for offering unregistered securities to the public through BUSD tokens.

The same source indicates that Paxos is trying to decide whether to contest the SEC’s decision in court or reach a settlement agreement. In the case of a settlement, other stablecoin issuers might want to pursue registration with the SEC, while a legal battle could potentially affect the market capitalisation of BUSD and Paxos. .