The central bank’s global cooperative organization views stablecoins in the context of international standards for payment, clearing and settlement systems.
Among the different types of digital assets, global authorities seem to be the most focused on stablecoins.
This concern is the result of several factors:
– The use of Stablecoin has exploded in a very short period of time, from less than US $ 3 billion in market capitalization at the start of 2019 to around US $ 130 billion in October 2021.
–Stable coins are intimately linked to the financial system because they function as an intermediary between traditional markets and crypto-asset markets.
– Stablecoin agreements are in many cases opaque with regard to the nature of the asset reserves underlying their monetary anchoring.
– Stable coins remain mostly unregulated.
Understanding and containing systemic risks in this booming asset class is therefore a top priority for regulators around the world.
The BRI report
On October 6, 2021, the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) released a joint report and consultation on regulation Stable Coin Agreements titled “Application of the Principles for Financial Market Infrastructures to Stable Agreements” (the BIS Report).
The BIS report does not offer new standards, but rather provides clarifying advice on how the Principles for Financial Market Infrastructures (PFMI) apply to systemically important stablecoins agreements. PFMIs, as defined by the BIS, are a set of 24 key international standards that the BIS has issued for financial market infrastructures (i.e. payment systems, central securities depositories, systems settlement systems, central counterparties and trade repositories) to strengthen and preserve stability.
While recognizing stablecoins as a new digital asset, the BIS report argues that they should be regulated as a financial market infrastructure similar to traditional payment, clearing and settlement systems. Since stable coin agreements “are mainly used to make payments, the principles that apply to payment systems…).”
The BIS report is structured around four of the 24 PFMI principles: governance, overall risk management, settlement purpose and cash settlements. Following these four principles, a consistently large stablecoin arrangement should:
- Use appropriate governance, including clear documentation and disclosures of management structures, control, lines of responsibility, operations and affiliations
- Develop appropriate risk management and mitigation frameworks and tools to address material risks (e.g. legal, credit, liquidity, operational and other risks) that it supports and poses to clients and affiliates (“Institutional interdependencies”)
- Provide a clear and final settlement (regardless of the operational settlement method used) and manage the risks resulting from a gap between the technical and legal purpose
- Minimize and strictly control the credit and liquidity risk resulting from the use of money other than the central bank
In addition, non-central bank money used as a settlement asset should be readily convertible into central bank money or other liquid assets under normal and difficult circumstances. Stablecoin deals must also monitor, mitigate and manage the “race risks” associated with large-scale buybacks and “fire sales” of reserve assets, with potentially systemic implications. Stablecoin deals should hold and invest assets in a way that minimizes the risk of loss and delay in accessing those assets.
Responses to consultation prompts are expected by December 1, 2021.
The way forward for Stablecoin surveillance
On October 7, 2021, the Financial Stability Board (FSB) released a progress report outlining the level of adoption by global regulators of its high-level recommendations for the oversight of global stablecoin that were released in October 2020. These recommendations included increased coordination of regulators and oversight of stable agreements to ensure that governance and risk management frameworks are in place to minimize systemic risks. The progress report noted that adoption of the recommendations was at an “early stage,” but the FSB tacitly urged global authorities to accelerate collaboration, implementation and cooperation to address systemic risks and prevent “regulatory arbitrage and harmful market fragmentation”.
According to the announcement accompanying the BIS report, “[e]each jurisdiction retains the prerogative to determine in its own context whether it allows stablecoin activity. If this is the case, and if a stable coins agreement is or is likely to become systemic, then the PFMI (supplemented by guidance from the report) would also apply.
A presidential advisory group led by the US Treasury Department is studying the potential impact of stablecoins on the US financial system and is expected to release its findings soon. It remains to be seen whether a US regulatory approach would incorporate the recommendations of the BIS or the FSB. However, the United States’ supervisory methods and risk management requirements are likely to share similarities with those of global supervisors, to the extent that stablecoins are considered a systemic risk.