Global monetary authorities and financial regulators have responded forcefully to the advent of privately developed global stablecoins.
By Todd Beauchamp, David L. Concannon, Stephen P. Wink, Simon Hawkins, Stuart Davis, and Deric Behar
A new report highlights the risks of global stablecoins and enumerates the legal, regulatory, and oversight hurdles a global stablecoin must clear before launching. The Group of Seven Working Group on Stablecoins released the report, titled Investigating the Impact of Global Stablecoins (G7 Report), at the October 2019 International Monetary Fund annual meeting. The G7 Report was published in tandem with a report by the Financial Stability Board (FSB) on the Regulatory Issues of Stablecoins (FSB Report). Taken together, the two reports provide insight into how some of the world’s most advanced economies (the US, the UK, Canada, France, Germany, Italy, and Japan) view digital assets and stablecoins, particularly those with the potential to launch and quickly scale on an established private-sector global network.
Global Stablecoins Face Many Legal, Regulatory, and Governance Hurdles
The G7 Report highlights many of the concerns the Working Group on Stablecoins has with the development of global stablecoins that are linked to a basket of real-world assets or sovereign currencies (although the report excludes algorithmic stablecoin arrangements from its purview, as their ability to maintain stable value with the underlying currency through bond issuance and algorithmic trading is doubted). Chief among concerns for the G7 is the purported threat global stablecoins may pose to global financial stability and national monetary sovereignty. The FSB Report foresees that a stablecoin payment system has the potential for material risk to systemic financial stability due to rapid scalability, the interconnectedness of the payment ecosystem, the impact on existing financial infrastructure, and various market integrity and cybersecurity concerns.
The G7 Report articulates these concerns by outlining four critical risks that global stablecoins could potentially pose, including:
- Anti-competition and antitrust risk, due to the possibility of market concentration and control by a dominant enterprise operating a proprietary platform
- Financial stability risk, due to the possibility of contagion into the real economy from inadequate handling of market, credit, and liquidity risks on the global stablecoin platform
- Monetary policy risk, due to the possibility of mass adoption of a global stablecoin as a store of value, thereby altering the impact of central bank policy on domestic interest rates and credit conditions
- International monetary system risk, due to the possibility of widespread currency substitution and threat to national monetary sovereignty
The G7 Report also identifies nine significant principles that must underpin all stablecoins, regardless of scale, including:
- Legal certainty in all relevant jurisdictions
- Sound governance, including the investment rules of the stability mechanism
- Financial integrity, including the prevention of money laundering, terrorist financing, and other forms of illicit finance
- Safety, efficiency, and integrity of payment systems
- Cybersecurity and operational resilience
- Market integrity, including fair and transparent price formation
- Data privacy, protection, and portability
- Consumer and investor protection
- Tax compliance and prevention of tax avoidance
The G7 Report puts all on notice that even if the myriad legal, regulatory, and governance concerns it enumerates are fully met, one cannot assume that approval to proceed with a global stablecoin will be granted: “[A]pproval may be contingent on additional regulatory requirements and adherence to core public policy goals.”
To better understand the current and evolving risks a global stablecoin could potentially pose, the FSB plans to take stock of existent regulatory and supervisory frameworks to assess their adequacy. The FSB will investigate those frameworks both domestically and “in a cross-border and cross-authority context” to determine if a global, multilateral approach is warranted. The FSB plans to submit a final report of its findings and recommendations to the G20 Finance Ministers and Central Bank Governors by July 2020.
Will Global Stablecoins Ever See the Light of Day?
The G7 Report acknowledges that stablecoins have potential societal benefits, including money transfer access and payment system inclusion for the estimated 1.7 billion unbanked adults worldwide. And it allows that current cross-border payment and remittance systems are “slow, expensive and opaque,” while stablecoin-based systems may provide cheaper and faster money transfers. But it does not seem to view global stablecoins on a private platform as the best way forward. Rather, it advocates the development and administration of coordinated central bank-controlled digital currencies and payment systems as the better route. Coordination and collaboration among public-sector developers would ideally be policy-based, technology-neutral, and inclusive, and would encourage responsible innovation and competition while preventing “harmful regulatory arbitrage,” according to the G7 Report. The report recommends that public-sector authorities coordinate domestically and cross-border to “develop road maps for supporting and scaling up ongoing efforts to improve the efficiency and inclusiveness of payment and financial services,” and at the same time continue to clarify policy issues and regulatory expectations with regard to global stablecoins.
The G7 Report will likely lend fuel to local regulatory efforts to limit global stablecoin projects.
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