The FSB, which promotes global financial stability among international bodies, and also reaches out to authorities in all G20 countries and in 70 other countries and jurisdictions, including a wide range of emerging market and developing economies, sets internationally agreed policies and minimum standards that its members commit to implement at national level.
With central banks, supervisors, securities regulators and ministries of finance across many global jurisdictions being FSB members, its policies are no doubt influential and impact across many countries, including emerging economies like Africa.
The new document seems to indicate an increased fear toward stablecoin arrangements and highlights key threats to national financial stability if these are adopted.
The document highlights a key characteristic of global stablecoins that warrant concern:
Financial stability risks from the current use of stablecoins are currently contained. This is largely due to the relatively small scale of these arrangements. However, the use of stablecoins as a means of payment or a store of value might significantly increase in the future, possibly across multiple jurisdictions. In addition, the different activities within a stablecoin arrangement, in particular those related to managing the reserve assets, may considerably increase linkages to the existing financial system. Such developments could change the current assessment.
Understanding how stablecoins, particularly GSCs, may create risks to financial stability is necessary to support effective regulation, supervision and oversight.
Here are some of the risks highlighted in the document:
- If a GSC were used as a common store of value, even a moderate variation in its value might cause significant fluctuations in users’ wealth
- If widely used for payments, any operational disruption in the GSC arrangement might
have significant impacts on economic activity and financial system functioning
- Exposures of financial institutions might increase in scale and change in nature –
particularly if financial institutions played multiple roles within a GSC arrangement (for
example as re-sellers, wallet providers, managers or custodians/trustees of reserve assets)
- The large-scale use of GSCs might magnify confidence effects. A greater sensitivity to confidence effects could also reflect the extent of the use of a GSC as a store of value and/or means of payment
- The design, functions and activities of a GSC arrangement could become a vulnerability. Of particular concern is the ability to liquidate a GSC at or near prevailing market prices which could reduce the “stable” value of the GSC relative to the reserve assets absent secondary guarantees. Such loss of value could impair user confidence in the resilience of the GSC arrangement as a payment mechanism, the financial institutions and the markets in which such assets were invested
- The potential fragilities in the governance, operation and design of the GSC arrangement’s infrastructure, including its ledger and the manner of validating users’ ownership and transfer of coins. In the event of a disruption in the GSC arrangement, ambiguity about rights and protection afforded to users could amplify confidence effects. In particular, if users do not have redemption rights or a direct claim on the underlying assets, confidence could be undermined
- The clarity of the roles and responsibilities of the GSC arrangement’s governance body – including in respect of setting and enforcing the rules on establishing the GSC’s value and on the functioning of the infrastructure – could affect users’ confidence
- vulnerability that relates to the applications and components on which users rely to store private keys and exchange coins. Such vulnerabilities could crystallise due to an operational incident at a wallet or exchange, for example. The scope of affected users might depend on the market share of the associated provider, and the degree to which it, for example, serves users in different jurisdictions. The degree of vulnerability would depend on the operational resilience arrangements for wallets and exchanges, including stand in and fall-back arrangements that ensure continuity of service to users, and of the continued liquidity of the secondary market for coins
When it comes to regulation, FSB notes that most jurisdictions do not currently have regulatory regimes specific to crypto-assets in general or stablecoins in particular. However, in most jurisdictions, existing regulatory, supervisory and oversight approaches, while not specific to crypto-assets or stablecoins, would apply in whole or part and would address some of the risks associated with stablecoins or with entities that are part of the stablecoin arrangement.
The most common approach is to identify the activity performed by a stablecoin arrangement and the participants involved, and apply the relevant existing regulation for that activity or entity according to the “same business, same risks, same rules” principle.
Most respondents note that stablecoins could be classified under more than one regulatory
category, and that the classification could change as the nature and use of a stablecoin evolves.
Interestingly, the document highlights several international financial standards that could potentially be applicable to the activities of a stablecoin arrangement, including standards for prudential regulation as well as AML/CFT regulation. One of these bodies is IOSCO, of which 30 African capital and securities authorities are member states.
It highlights a preliminary analysis on the application of the Principles for Financial Market Infrastructures (PFMI) stablecoin arrangements and their activities carried out by IOSCO. The PFMI include 24 high-level principles applicable to systemically important FMIs.
FSB points to a March 2020 IOSCO report that assesses the implications that global
stablecoin proposals could have for securities market regulators. It concludes that GSCs may, depending on their structure, present features that are typical of regulated securities or other regulated financial instruments or services. It then engages in a lifecycle analysis of a hypothetical stablecoin used for domestic and cross-border payments. The hypothetical stablecoin uses a reserve fund and intermediaries to try to achieve a stable price vis-a-vis a
basket of low volatility currencies.
According to FSB, several principles and standards could apply to the hypothetical stablecoin offering.
The document concludes by offering authorities 10 recommendations that complement international sectoral standards and principles for cross-border cooperation relevant to the supervision and oversight of GSC arrangements. The body also says the recommendations set out are expectations for providers of services and activities within the GSC arrangements and can serve as a basis for authorities’ active engagement with stakeholders on GSC-related risks and how these are addressed.
- Authorities should have and utilise the necessary powers and tools, and adequate
resources, to comprehensively regulate, supervise, and oversee a GSC
arrangement and its multi-functional activities, and enforce relevant laws and regulations effectively
- Authorities should apply regulatory requirements to GSC arrangements on a
functional basis and proportionate to their risks
- Authorities should ensure that there is comprehensive regulation, supervision and
oversight of the GSC arrangement across borders and sectors. Authorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication and consultation in order to support each other in fulfilling their respective mandates and to facilitate comprehensive
regulation, supervision, and oversight of a GSC arrangement across borders and sectors
- Authorities should ensure that GSC arrangements have in place a comprehensive
governance framework with a clear allocation of accountability for the functions and activities within the GSC arrangement
- Authorities should ensure that GSC arrangements have effective risk management
frameworks in place especially with regard to reserve management, operational resiliency, cyber security safeguards and AML/CFT measures, as well as “fit and proper” requirements
- Authorities should ensure that GSC arrangements have in place robust systems for
safeguarding, collecting, storing and managing data
- Authorities should ensure that GSC arrangements have appropriate recovery and
- Authorities should ensure that GSC arrangements provide to users and relevant
stakeholders comprehensive and transparent information necessary to understand
the functioning of the GSC arrangement, including with respect to its stabilisation
- Authorities should ensure that GSC arrangements provide legal clarity to users on
the nature and enforceability of any redemption rights and the process for redemption, where applicable
- Authorities should ensure that GSC arrangements meet all applicable regulatory,
supervisory and oversight requirements of a particular jurisdiction before commencing any operations in that jurisdiction, and construct systems and products that can adapt to new regulatory requirements as necessary
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