The report encourages the G20 to consider a broad set of supervisory principles when evaluating global stablecoin arrangements.
On April 14, 2020, the G20’s Financial Stability Board (FSB) published a consultation on the regulation, supervision, and oversight of privately issued global stablecoins (Addressing the Regulatory, Supervisory and Oversight Challenges Raised by “Global Stablecoin” Arrangements). The consultation includes 10 high-level recommendations that promote a multilateral approach to oversight defined by flexibility, consistency, coordination, and information-sharing between jurisdictions to keep apace of the changing nature of the risks posed by global stablecoins. While acknowledging the potential financial service benefits of global stablecoins, the FSB highlights some of the downstream impacts global stablecoins may have on national economies, across borders, and on the global financial system.
The consultation builds on the FSB’s pledge in October 2019 to assess global stablecoins and to take stock of existing regulatory and supervisory frameworks, and to submit a consultative report to the G20 Finance Ministers and Central Bank Governors (Regulatory Issues of Stablecoins, covered in Latham’s previous post). The FSB has been at the forefront of international authorities’ effort to reckon with the pressing need for faster, safer, and more efficient global payment systems, and the current consultation on global stablecoins follows the FSB’s work to develop a roadmap to enhance cross-border payments. On April 9, 2020, the FSB delivered a report to the G20 cataloguing the current arrangements, opportunities, challenges, and risks in the global payment ecosystem (Enhancing Cross-border Payments). The FSB noted in its preliminary assessment that new technologies and business models in cross-border payments (such as private sector proposals to create stablecoins for payment purposes) are being examined carefully for soundness and viability.
The stablecoin consultation will remain open until July 15, 2020, and a final report on the FSB’s findings and recommendations will be published in October 2020. The FSB’s cross-border payments roadmap is also scheduled for delivery in October 2020.
A Supervisory Framework for Global Stablecoins
The FSB’s recommendations to G20 member states are intended to lay the groundwork for authorities to regulate global stablecoins, clarify the attendant issues, and guide approaches to risk mitigation. According to the report, identified risks of stablecoins are relatively contained due to the small scale of current stablecoin operations, though they may increase as projects scale up and stablecoins are adopted widely as means of payment or store of value. The FSB recommends that the G20 establish and implement the following supervisory framework in advance of any further scaling:
- Self-Empowerment: Authorities should assert and employ the authority to regulate, supervise, and oversee global stablecoins, identify and rectify regulatory gaps, and enforce relevant laws and regulations effectively. Authorities should also have the ability to prohibit the use of stablecoins in their jurisdictions if applicable regulatory, supervisory, and oversight requirements are not met.
- Parity: Authorities should apply regulatory requirements to global stablecoins on a functional basis and proportionate to their risks, according to the “same business, same risks, same rules” principle. If existing regulations do not adequately capture the risks, authorities should work to develop new frameworks, or supplement existing frameworks, to remediate the regulatory gaps.
- Cooperation: Authorities should ensure that regulatory oversight of global stablecoins is coordinated domestically, across borders, and across sectors. Authorities from applicable agencies and jurisdictions should also foster effective communication to support each other in their regulatory capacities.
- Governance: Authorities should ensure that global stablecoin arrangements possess comprehensive governance frameworks with clear allocation of accountability for all relevant functions and activities.
- Risk Management: Authorities should ensure that global stablecoin arrangements possess effective risk management frameworks (including policies and procedures), especially with regard to due diligence of principals, reserve assets management, credit risk, liquidity risk, market risk, operational resiliency, cybersecurity, and financial crimes compliance measures.
- Data Security: Authorities should ensure that global stablecoin arrangements possess robust systems for safeguarding, collecting, storing, and managing data, in conformance with all governing data privacy requirements.
- Resolution Preparedness: Authorities should ensure that global stablecoin arrangements possess adequate recovery and resolution plans, under all applicable governing jurisdictions.
- Transparency: Authorities should ensure that global stablecoin arrangements provide to users and relevant stakeholders comprehensive and transparent information necessary to understand the functioning of the global stablecoin arrangement, including with respect to its stabilization mechanism, investment of reserve assets, custody and segregation of assets, and dispute resolution mechanisms.
- Legal Clarity: Authorities should ensure that global stablecoin arrangements provide legal clarity to users on the nature, process, and enforceability of any applicable redemption rights, and recovery channels in event of cyberattack or other operational incident.
- Compliance: Authorities should ensure that global stablecoin arrangements meet all applicable regulatory, supervisory, and oversight requirements before commencing any operations. Global stablecoin operators should understand the regulatory requirements that govern their operations across jurisdictions, and should construct products and systems that can adapt to evolving regulatory requirements.
A Fork in the Road for Authorities
The FSB’s recommendations, while not binding on the G20, provide those jurisdictions with a potential framework for regulating applicable digital assets. Notably, the FSB states that while the report focuses on global stablecoins held as a means of payment or store of value for consumers and businesses, its finding and recommendations may also apply to non-global stablecoins, stablecoins used for wholesale transactions among financial institutions, and “other crypto assets that could pose risks similar to some of those posed by [global stablecoins] because of comparable international reach, scale and use.”
Stablecoin launches have grown significantly (e.g., Messari reports that the market cap of stablecoins on Ethereum is now almost US$6 billion, up from US$835 million in January, 2019), but their potential remains largely untapped. The coordinated oversight of private global stablecoins, if light-handed and flexible, could lead to clarity and significant innovation in this space. However, there is no indication to date that such an approach is being considered. Rather, authorities are advised to “not permit the operation of a [global stablecoin] arrangement in their jurisdiction unless the [global stablecoin] arrangement meets all of their jurisdiction’s regulatory, supervisory, and oversight requirements.” Given the operational complexity and cross-border nature of global stablecoin models, compliance with incomplete or inchoate regulatory frameworks may prove to be an incredibly high hurdle, and may ultimately stifle innovation. However, a coherent regulatory regime for global stablecoins will help to promote responsible innovation and contribute to the cross-border payments ecosystem.