Regulatory issues surrounding stablecoins and their potential impact on global financial stability

SUMMARY

On 18 October 2019, the Financial Stability Board (the “FSB”) issued a note (the “Note”) regarding regulatory issues of stablecoins as part of its Group of 20 (“G20”) mandate. The Note highlights that the development of this type of cryptoasset in particular may alter the G20’s current assessment that cryptoassets do not pose a risk to global financial stability. The FSB aims to submit a consultative report to the G20 in April of this year (2020) as an attempt to address and counter potential risks regarding stablecoin arrangements and a final report in July of this year.

BACKGROUND

The FSB is one of the many international bodies involved in the process of setting international standards for financial markets, which are better known as “soft law”. Despite being non-legally binding, in practice they are widely adhered to by national authorities and market players around the globe, as they generate regulatory harmonisation and soundness.

Although the G20 is currently of the view that cryptoassets, at this point, do not pose risks to financial stability, the group has asked the FSB and other standards-setting bodies to provide advice on additional responses as needed.

In this respect, the Note is the FSB’s response to the recent announcement by private sector actors of their intention to launch stablecoin-type arrangements for domestic and cross-border retail payments, potentially reaching global scale and, in FSB’s opinion, becoming a source of systematic risk.

STABLECOIN ARRANGEMENTS AS A SOURCE OF SYSTEMATIC RISK

Stablecoins are cryptoassets designed to maintain a stable value, as they relate to another existing asset (usually fiat money, i.e., coins and banknotes declared by governments as acceptable for the settlement of debts, or commodity).

The FSB lists four main reasons for stablecoin arrangements to be considered a source of systematic risks:

  • they have the potential to grow quickly as a means of payment and store of value, functions currently intrinsic to traditional money. Since they have low volatility and greatly scalable, such assets may be widely-used by consumers and accepted by corporations as payment instruments, potentially replacing the use of domestic currencies;
  • they present a combination of characteristics of different financial services, such as payment systems, bank deposits and commodities, which, in the FSB’s opinion, may, on a large scale, give rise to new financial stability risks;
  • they are increasingly linked to the financial system. Some examples given by the FSB are: retail transactions using stablecoins that may require settlement in fiat currencies; traditional financial institutions that may serve as stablecoins custodians; large use of stablecoins that could potentially affect bank funding, etc.; and
  • they can cause concerns regarding market manipulation and lack of market integrity, anti-competitive behaviour, lack of adequate data protection, money laundering, terrorism financing and other illicit financial activities. This, in turn, might have financial stability implications and adverse confidence effects.

REGULATORY ISSUES TO CONSIDER AND ACTION TO BE TAKEN

According to the Note, an effective regulatory and supervisory approach on stablecoin arrangements must be able to identify, monitor and address potential risks. In this sense, the FSB intends to:

  • review existing regulatory and supervisory frameworks and practices with a focus on cross-border issues, taking into account the perspective of emerging markets and developing economies;
  • consider whether such existing frameworks and practices are adequate and effective in addressing financial stability and systemic risk; and
  • advise on possible multilateral responses, if needed, including developing new regulatory and supervisory frameworks to addressing financial stability and systemic risk at a global level.

The FSB will submit a consultative report to the G20 Finance Ministers and Central Bank Governors in April 2020, and a final report in July 2020.

To view the Note please click here.

For more information, and any guidance or advice on stablecoin arrangements and cryptoassets in general, Cleveland & Co External In-house counselTM, your specialist outsourced legal team, are here to help.

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