Regulatory risks of Stablecoins in focus

The emergence of global stablecoins has been a focus point over the past few days, with the FSB, FATF and the G7 Working Group on Stablecoins all publishing statements on the impact and risks of the development of these crypto-assets.

The FSB published an issues note on regulatory issues of stablecoins on 18 October. The paper, responding to the G20 Leaders’ Osaka Declaration, found that the emergence of stablecoin-type arrangements for domestic and cross-border payments potentially on a global scale could alter the current view that cryptocurrencies do not pose a material risk to financial stability. However, despite the potential risks, the FSB noted that the development of global stablecoins that could be used by a large number of people across many different countries could provide benefits to the financial system and the wider economy as a whole.

The FSB acknowledged that effective regulatory and oversight arrangements will be required to capitalise on those potential benefits whilst containing the associated risks. The FSB will:

  • Assess both existing supervisory and regulatory approaches and emerging practices, focusing on cross-border issues and taking developing economies into account;
  • Based on this assessment, consider whether existing approaches are adequate in tackling risk concerns that could arise from stablecoin-type arrangements; and
  • Advise on possible multilateral responses, including developing regulatory and supervisory approaches to addressing financial stability and risk concerns at a global level.

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

In the same week, the G7 Working Group on Stablecoins published its report on investigating the impact of global stablecoins. The report welcomed the FSB’s plans to assess what key regulatory issues exist in respect of global stablecoins and to submit a consultative report in spring 2020. The Working Group’s report found that stablecoins pose legal, regulatory and oversight risks in relation to legal certainty, anti-money laundering efforts, operational resilience (including for cyber security), market integrity, consumer/investor and data protection, and tax compliance. The report suggested that the emergence of stablecoins on a global scale may not merely amplify these challenges but present new challenges to competition policy, financial stability, monetary policy and the international monetary system.

The report sets out initial recommendations for both private sector stablecoin developers and public sector authorities. It also encourages public stakeholders, such as central banks and finance ministries, to develop road maps for improving the efficiency of payments and financial services. These road maps could include:

  • Supporting initiatives to improve cross-border payments. This could include endorsing the standardisation of payment processes and promoting direct or indirect interlinking of payment infrastructures;
  • Promoting financial inclusion; and
  • Improving coordination between authorities both domestically and across borders.

Finally, the FATF has announced that it has agreed how to assess countries’ implementation of the first global standards introduced in June to address to money laundering risks of virtual assets. In its statement, the FATF acknowledged that global stablecoins, which would be subject to the FATF standards, could have implications for money laundering and terrorist financing risks. The FATF’s main concern is that mass-market adoption of virtual assets and person-to-person transfers, without the need for a regulated intermediary, could prevent it from being able to detect and prevent money laundering and terrorist financing.

The FATF confirmed that it is actively monitoring global stablecoins. It will continue to examine their risks and will consider clarifying further how the FATF standards apply to global stablecoins and their service providers. The FATF will report to G20 Finance Ministers and Central Bank Governors in 2020 on the risks posed by global stablecoins.

Emma Radmore