Financial Stability Board proposes recommendations for international regulators regarding global stablecoins

The Financial Stability Board has proposed 10 high-level recommendations for the “effective supervision” of global stablecoins by international regulators.

Most importantly, the FCB recommended that authorities should have and employ “the necessary powers and tools to comprehensively regulate, supervise and oversee a GSC arrangement” and apply requirements to GSCs on a functional, technologically neutral basis that is “proportionate to their risks.” Moreover, a comprehensive regulatory scheme must exist among different jurisdictions, and there must be cross-border cooperation and coordination among different national regulators.

Established in 2009, the FSB is an international organization comprising representatives of national authorities responsible for financial stability in material international financial centers that monitors and makes recommendations about the global financial system.

The FSB considered two types of GSCs: those that are asset-linked and seek to maintain a stable value by reference to real or financial assets or other cryptoassets, and those based on algorithms that seek to maintain a stable value through protocols that automatically adjust the supply of the stablecoin in response to changes in demand. The FSB affirmatively determined not to include central bank-issued digital currencies in its analysis of global stablecoins. (Click here for a discussion of a proposed issue of a CBDC by the Bank of England in the article “Bank of England Evaluates Central Bank-Issued Digital Currency” in the March 15, 2020 issue of Bridging the Week. Apparently the Peoples Bank of China began testing a national digital currency in a few cities during April; click here for background in Chinese.)

The FSB noted that GSCs typically involve three functions: (1) the issuance, redemption and stabilization of the value of the GSC; (2) the transfer of the GSC; and (3) interaction with other GSC users for storing and exchanging GSCs. The FSB concluded that in many ways these functions parallel functions of other payment systems or financial services or products and are subject to the same risks. However, they may also be subject to new risks depending on the design of the GSC. These risks include financial stability as well as market liquidity and credit risk, and operational and fraud risk, including being used for money-laundering purposes.

Other recommendations by the FSB for international authorities included ensuring GSCs:

  • have comprehensive governance frameworks;

  • have effective risk management frameworks particularly regarding reserve management; operational resiliency, cyber security safeguards and AML measures;

  • have robust systems for safeguarding and managing data;

  • have appropriate recover and resolution plans; 

  • have comprehensive and transparent information regarding their functioning and operations;

  • have legal clarity on redemption rights, if applicable; and

  • meet all applicable regulatory requirements prior to commencing operations.

Comments on the FSB’s proposals will be accepted through July 15, 2020.

In other legal and regulatory developments impacting crypto assets:

  • Bitnomial Exchange Approved by CFTC as Contract Market for Margined Futures on Physically Deliverable Bitcoin Futures: The Commodity Futures Trading Commission approved the application the Bitnomial Exchange to offer margined and physically deliverable bitcoin US dollar futures and options contracts. (Click here to access initial contract specifications.) Bitnomial’s contracts will be cleared through the Minneapolis Grain Exchange. Bitnomial first applied for DCM designation in 2016. The exchange is backed by Jump Capital, Coinbase Ventures, DV Chain, RRE Ventgures, Digital Currency Group, ValueStream Ventures Indicator Fund and various individual investors. 
  • Libra Revises Stablecoin Proposal: The Libra Association issued a revised whitepaper describing its stablecoin proposal. Its first whitepaper was issued in June 2019. (Click here for background in the article in the My View commentary to the article “Global AML Standards Setter Says Countries Should Require Virtual Asset Service Providers to Obtain and Transmit Certain Information Regarding Senders and Recipients for All Virtual Asset Transfers” in the June 23, 2019 edition of Bridging the Week.)

The Association’s goal is to create a “simple global payment system and financial infrastructure” to provide an alternative international payment system for unbanked persons as well as others. The Libra global stablecoin was initially proposed to be backed by a combination of cash, cash equivalents and short-term government securities and for its core blockchain to ultimately evolve to a decentralized system. This proposal has been revised so that some Libra stablecoins would solely be single currency denominated (e.g., US dollar, Great Britain pound) and the overall Libra reserve would constitute cash, cash equivalents and short-term government securities corresponding to the composition of outstanding single-currency stablecoins. The Libra global stablecoin would be tied to individual currency Libra stablecoins. The Libra Association has now proposed that the basket composition and weights of its reserve be overseen by a “group of regulators and central banks or an international organization (e.g., IMF) under the guidance of the Association’s main supervisory authority, the Swiss Financial Market Supervisory Authority.”

Additionally, the Libra Association proposed to forego any evolution of the Libra blockchain to a permissionless system to help ensure system security and a more robust compliance framework around its stablecoins as well as better protections for its reserves.

The Libra initiative was initially announced and backed in principal part by Facebook.

My View: There may be a race between privately developed global stablecoins and central bank-issued digital currencies. It is important that any requirements (or impediments) imposed on GSCs should also be applicable to CBDCs as there is little that would automatically make a CBDC safer than a privately issued alternative. If the principle “same risks, same regulations” means anything, it should mean that payment systems designed by governments should be subject to the same standards as any private payment systems. Governments should not be given an advance position at the starting gate solely because they are governments and are in a position to impede private innovation. 

The FSB’s consultation expressly determined to place CBDCs outside the scope of its analysis and recommendations. This is a major oversight. CBDCs should be within the scope of the FSB’s final review and guidance.

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