On Monday the Financial Stability Board (FSB) published its final report and high level recommendations on the regulation, supervision and oversight of "global stablecoin" (GSC) arrangements.
The report considers that the emergence of GSCs may challenge existing regulatory, supervisory and oversight approaches and expose gaps in both their comprehensiveness and effectiveness, as a result of GSCs' operation across multiple existing frameworks (i.e. banking, payments and securities/investments). The FSB has identified a number of vulnerabilities to which GSCs could give rise, namely:
- AML/terrorist financing risks;
- governance issues posed by GSCs' decentralised models;
- market, liquidity and credit risks arising from GSCs' redemption and stabilisation mechanics; and
- operational and cyber risks arising from the reliance of GSCs on technology to record transactions and access, transfer and exchange coins.
This is not the first time that such concerns have been expressed. Indeed these issues have been raised in political fora in one shape or another many times in the last year or so. New to the table however are the FSB's recommendations on how to address the risks which it regards as inherent in the operation of GSCs.
The ten recommendations are addressed to regulatory authorities around the world, suggesting that they should:
- ensure they have the requisite powers, tools and resources to regulate, supervise and oversee GSC arrangements (and associated functions and activities) effectively;
- apply all applicable requirements (including international standards) to GSC arrangements on a functional basis and proportionately to the risk posed;
- co-operate with other authorities both domestically and internationally;
- ensure that GSC arrangements have a clear governance framework and that there is clear accountability for each function of the GSC;
- ensure that GSC arrangements have effective risk management frameworks in place and that these cover reserve management, operational resilience, cyber security safeguards and AML/CFT measures, as well as ‘fit and proper’ requirements;
- ensure that GSC arrangements have in place robust systems for collecting, storing and safeguarding data;
- ensure that GSC arrangements have appropriate recovery and resolution plans;
- ensure GSC arrangements are sufficiently transparent that stakeholders can understand how they operate;
- ensure that there is legal clarity on the nature and enforceability of any redemption rights and the process for redemption (if relevant); and
- ensure that GSC arrangements meet all applicable legal and regulatory requirements before commencing operations.
Given the nature and standing of the FSB, it can be assumed that these or similar principles, while only high-level at this stage, will form the foundation for national regulatory approaches to stablecoins in due course.
While so-called “global stablecoins” have the potential to contribute to developing new global payment arrangements, they could present a host of challenges to the regulatory, supervisory, oversight and enforcement authorities.