Summary
This report from the Financial Stability Board (FSB) discusses the emergence of global stablecoins (GSCs) and their potential to enhance financial services’ efficiency while posing risks to financial stability, particularly if they become widely adopted. Stablecoins tie their value to other assets, such as sovereign currencies, to reduce the volatility of traditional cryptocurrencies. Stablecoins could improve payments and promote financial inclusion, but they could also challenge the effectiveness of current regulatory approaches and lead to money laundering, governance, and liquidity risks. The report proposes ten recommendations for coordinated and effective regulation, supervision, and oversight of stablecoins that are proportionate to the risks they pose. These recommendations focus on privately issued global stablecoins for retail use but could be applied to other stablecoins and crypto-assets. The report stresses the importance of addressing the concerns of GSCs with regard to financial stability. It does not cover issues such as AML/CFT, data privacy, cyber security, and consumer and investor protection.
Key points
The report provides 10 key recommendations for regulators regarding GSCs and financial stability. They are:
- Authorities should have and utilise the necessary powers and tools, and adequate resources, to comprehensively regulate, supervise and oversee a GSC arrangement and its associated functions and activities, and enforce relevant laws and regulations effectively.
What FSB is saying here is that Authorities (the government) should use powers and tools, such as drafting new laws, imposing licenses, setting up oversight bodies or even outlawing GSCs, to make sure that GSCs are properly regulated. But just setting up a licensing scheme is not enough. Each authority should also make sure that can properly enforce the laws and licensing governing GSCs. You can think of attributing new powers to the local financial authority so they can inspect companies that issue GSC and fine them if necessary.
- Authorities should apply comprehensive regulatory, supervisory and oversight requirements and relevant international standards to GSC arrangements on a functional basis and proportionately to their risks
The FSB is recommending that authorities take a so-called “technology-neutral approach” when regulating GSCs. This means that authority should look at how a GSC operates and what the risks are from this operation. In the eyes of the FSB, a GSC poses a similar risk to other financial service providers and they should be treated as such. So, the FSB recommends that the GSC will be submitted to a whole range of regulations, policies and international standards, similar to, for example, banks, payment service providers and other financial institutions. Furthermore, if existing laws don’t cover the risk that GSCs pose, the authority should write new laws.
- 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 ensure comprehensive regulation, supervision, and oversight of a GSC arrangement across borders and sectors.
The FSB understands that stablecoins, especially GSCs, aren’t confined to just one country and that authorities must work together on topics such as anti-money laundering and cross-border transactions. But that’s not it. The FSB also sees that GSCs touch upon a range of different policies, meaning that on a domestic level (within a country) different governmental bodies might need to work together. For example, in a country, you might have two different agencies, one for consumer protection and one for financial stability. GSCs pose risks and opportunities in both areas, so the agencies should work together.
- 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.
This recommendation is about transparency, responsibility and accountability or the company and people behind the GSC. The FSB recommends that governments should ensure that international standards are applied to providers of GSCs. The international standards that the FSB refers to are standards about the accountability of the directors, investment activities, responsible handling of reserve assets, and more.
- Authorities should ensure that GSC arrangements have effective risk management frameworks in place especially with regard to reserve management, operational resilience, cyber security safeguards and AML/CFT measures, as well as ‘fit and proper’ requirements.
The FSB wants to make sure with this recommendation that nothing goes wrong in a broad sense. “effective risk management frameworks” are coming in financial world and since GSCs will handle large amounts of money, the FSB wants to make sure that the same frameworks are applied to them. Risk management is not just about having a password on your laptop. In this context risk management relates to “operational risks, money laundering/terrorist financing risks, and cyber risks, and provide for appropriate consumer and investor protection”.
- Authorities should ensure that GSC arrangements have in place robust systems for collecting, storing and safeguarding data.
This recommendation is about privacy and money laundering. The FSB recommends that governments make sure that they can request necessary data from GSCs and make sure that GSCs handle user data responsibly.
- Authorities should ensure that GSC arrangements have appropriate recovery and resolution plans.
This recommendation is about bankruptcies and other negative events. Financial institutions need to have plans in place in case they become insolvent (unable to pay debt). The FSB recommends that the same is implemented for GSCs.
- Authorities should ensure that GSC arrangements provide users and relevant stakeholders with comprehensive and transparent information necessary to understand the functioning of the GSC arrangement, including with respect to its stabilisation mechanism.
With this recommendation, the FSB wants to make sure that we will not see another TERRA/LUNA collapse. The FSB recommends that governments make sure that GSCs are open about how they do business and how they stabilize their stablecoin.
- 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.
This recommendation is to make sure that governments implement laws and policies to make sure that user of the GSC get their money back. The FSB wants to make sure that all users who buy the stablecoin with fiat money can understand how to get their fiat money back. Also in events where the GSC providers tries to run off with the money or if the provider goes bankrupt.
- Authorities should ensure that GSC arrangements meet all applicable regulatory, supervisory and oversight requirements of a particular jurisdiction before commencing any
Last, the FSB recommends that governments should not allow a GSC provider to operate in their country unless they meet all legal requirements of THAT country. This is to prevent the GSC sets up shop in Country A and doing business in Country B without playing by the rules of Country B.
Published by:
Financial Stability Board (FSB)