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FSB: ‘stablecoins’ need to address risks

Financial Stability Board: its secretariat is hosted by the Bank for International Settlements in Basel, Switzerland | Credit: BIS

The Financial Stability Board (FSB) has published its high-level recommendations for the regulation and oversight of global ‘stablecoins’.

So-called stablecoins are a category of crypto-assets – digital assets recorded on distributed ledgers – with the potential to improve the efficiency of financial services, but may also create risks to financial stability, ‘particularly if they are adopted at a significant scale’, the FSB warns.

Its report, published following a public consultation, makes it clear that stablecoins are expected to adhere to all applicable regulatory standards and to address risks to financial stability before launching, and to adapt to new regulatory requirements as necessary.

The best-known stablecoin project is social media giant Facebook’s Libra. Regulators, central banks and politicians have largely reacted cautiously and coolly towards Libra – which does not receive a single mention in the FSB report’s 73 pages – since Facebook began to detail its ambitions last year.

A widely adopted stablecoin with a potential reach and use across multiple territories – a global stablecoin – could become ‘systemically important’ in and across one or many jurisdictions, the FSB says.

AML and data on risks radar

The FSB has made 10 high-level recommendations to address the financial stability risks that it says are posed by global stablecoins, both at the domestic and international level.

The FSB – whose secretariat is hosted by the Bank for International Settlements in Basel, Switzerland – says the recommendations support ‘responsible’ innovation and ‘provide sufficient flexibility for jurisdictions to implement domestic approaches’.

Among the recommendations are that authorities should ensure that global stablecoin arrangements have effective risk management frameworks in place especially with regard to reserve management, operational resilience, cyber-security, safeguards and anti-money laundering (AML)/countering the financing of terrorism (CFT) measures, as well as ‘fit and proper’ requirements; and that authorities should ensure that global stablecoin operators have robust systems for collecting, storing and safeguarding data.

The FSB received 53 responses to its consultation, which launched in April. Respondents included financial institutions and fintech trade associations.

The recommendations in the report have not changed substantially from those in the consultation document.

Digital currency news site CoinDesk said the FSB’s report ‘underscores how far prospective stablecoin issuers still have to go’.

G7 statement on stablecoins

The G7 – the US, UK, Canada, Germany, France, Italy and Japan – has also issued a statement on stablecoins. ‘The G7 continues to maintain that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards,’ the bloc said.

In the joint-statement, the G7 nations also said they were ‘concerned by the rising threat of ransomware attacks, particularly in light of malicious actors targeting critical sectors amid the COVID-19 pandemic’.

The G7 continued: ‘These attacks, which often involve payments in crypto-assets, jeopardise essential functions along with our collective security and prosperity. We affirm our resolve to combat this threat collectively as well as individually.’

Looking ahead, the FSB has pledged to complete international standard-setting work by December 2021, among other commitments.

Separately, the FSB has also released the third and final publication in a series looking at cross-border payments. The 36-page document, ‘Enhancing Cross-Border Payments’, follows a first report that set out the challenges facing cross-border payments, and a second publication that set out ‘19 building blocks for a global roadmap’. Cross-border inefficiencies are a significant challenge in payments and seen to be driving private-sector initiatives such as stablecoins.