Stablecoins are emerging as one of the most important links between the cryptocurrency ecosystem and traditional finance, but their growing role is raising a critical regulatory question: Is supervising the company that issues a stablecoin enough?
Unlike highly volatile cryptocurrencies such as Bitcoin, stablecoins are designed to maintain a relatively stable value by being linked to traditional currencies, most commonly the US dollar. Their stability has helped position them as a bridge between digital assets and conventional money, with use cases ranging from cross-border transfers to payments in some markets.
The global stablecoin market has now grown beyond $300 billion, reflecting the rapid expansion of digital-dollar and similar assets. However, the market remains heavily concentrated, with two leading issuers accounting for around 90% of total stablecoin value.
As adoption increases, regulators worldwide are introducing frameworks covering how stablecoins are issued, traded, backed and redeemed. A recent paper from the Bank for International Settlements (BIS) highlights a significant challenge in these regulatory efforts: while authorities broadly agree that stablecoins need oversight, they differ considerably on which entities should be allowed to issue them and what activities those entities should be permitted to undertake.
Stablecoin Issuers Face Different Rules
In many jurisdictions, stablecoin issuers are restricted to a relatively narrow set of activities, including issuing tokens, redeeming them and managing the reserves that support their value.
Regulators also generally require issuers to maintain reserves in safe and high-quality assets. The objective is straightforward: stablecoin users should be able to redeem their holdings at the promised value when required.
The regulatory treatment becomes more complicated when comparing banks with non-bank stablecoin issuers.
Banks that issue stablecoins are often permitted to undertake a broader range of financial activities, including lending and trading. This flexibility largely reflects the fact that banks and their wider corporate groups are already subject to extensive prudential supervision.
Non-bank issuers, by contrast, often face stricter restrictions. Depending on the jurisdiction, they may be prohibited from activities such as crypto lending or providing custody services to third parties. The intention is to separate stablecoin issuance from potentially riskier financial activities.
However, the BIS analysis highlights a potential weakness in this approach.
The Regulatory Gap Within Corporate Groups
A major concern is that some regulatory frameworks focus primarily on the legal entity that actually issues the stablecoin rather than the issuer’s entire corporate group.
That distinction could create a loophole.
For example, a company could establish a separate sister or affiliated company to conduct activities that the stablecoin issuer itself is prohibited from undertaking. While the issuing entity would technically remain compliant, the wider corporate group could still accumulate the very risks regulators intended to prevent.
This creates a difficult question for policymakers: Should regulation stop at the legal boundary of the stablecoin issuer, or should it extend across the wider group?
The answer could become increasingly important as stablecoin businesses expand into multiple areas of digital finance.
How Risks Could Spread to Stablecoin Holders
The risks associated with related companies may initially appear separate from the stablecoin issuer. In practice, however, financial stress can spread across entities within the same corporate group.
If an affiliated company suffers substantial losses, confidence in the wider group could deteriorate. Stablecoin users may then become concerned about the strength of the issuer and rush to redeem their tokens.
Large-scale redemptions could force the issuer to liquidate reserve assets quickly. If the issuer were unable to meet redemption demands smoothly, the resulting pressure could affect confidence in the stablecoin and potentially create broader market instability.
This means that financial risks do not necessarily need to originate inside the stablecoin-issuing company to threaten the stability of the stablecoin itself.
Why Regulators May Need a Group-Wide Approach
The BIS discussion points toward a broader regulatory framework for non-bank stablecoin issuers, one that considers the activities and risks of the entire corporate group rather than just the issuing entity.
One possible approach would be to restrict the entire corporate group to a clearly defined set of permitted activities.
Another option would be to require regulatory approval before a stablecoin-related group enters additional businesses. Authorities could then assess the risks associated with each activity and impose appropriate safeguards.
Such a framework would also require stronger coordination between regulators, particularly because stablecoin companies can operate across multiple jurisdictions while their digital assets can move globally within seconds.
What This Means for India
The issue has particular relevance for India as the country continues to shape its regulatory approach toward virtual digital assets.
Stablecoins are not confined to the jurisdiction in which they are issued. Their cross-border nature means that regulatory decisions taken in major financial centres can influence users, businesses and markets elsewhere, including India.
For Indian policymakers, the growing global debate offers an opportunity to address potential regulatory gaps before they become systemic problems.
A framework that focuses solely on the stablecoin-issuing company may not be sufficient if affiliated entities can undertake higher-risk activities outside the regulator’s immediate scope. A group-wide regulatory approach could help ensure that risks cannot simply be shifted to another company within the same corporate structure.
At the same time, regulation needs to strike a balance. Excessively restrictive rules could discourage legitimate innovation in digital payments and blockchain-based financial services. A well-designed framework should instead create room for responsible innovation while maintaining safeguards for consumers and financial stability.
Looking Beyond the Stablecoin
Stablecoins are designed to offer stability in an otherwise volatile digital-asset market. But ensuring that stability may require regulators to look beyond the token and even beyond the company that issues it.
The key risk may sometimes sit elsewhere within the corporate group.
As stablecoins become increasingly integrated into payments, trading and cross-border finance, regulators may need to widen their focus accordingly. For India and other major economies developing digital-asset frameworks, the lesson is increasingly clear: protecting stablecoin markets may require understanding not only what the issuer does, but also what the wider group surrounding it is allowed to do.
Bureau