The Financial Stability Board, an influential international body that is composed of all G20 members, on April 14 has published a lengthy document on regulating stablecoins that provides some insight into the regulatory body’s approach to the asset class.
Titled ‘Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements’, the document examines the impact and, in its own words, the risks associated with stablecoins that could operate on a global level. Stablecoins that are mentioned include Tether (USDT), DAI (DAI) and TrueUSD (TUSD), among many others.
Extensively reported in the media, the document makes the distinction between “Global Stablecoins”, and other crypto-assets and stablecoins - and invites comments on the potential risks of stablecoins operating across borders. In its conclusion, it offers a multilateral set of high-level recommendations.
The FSB outlines several potential vulnerabilities of Global Stablecoins in the document which, summarized, are fraud, conflict of interest, governance and lack of contractual arrangements. It is here that the FSB makes the extreme claim that, should the oversight and regulation of these assets be ineffective, governments should go to the extent of “prohibiting fully decentralised systems.”
Ability to require a GSC arrangement to be governed in a manner that facilitates effective regulation and supervision, including by prohibiting fully decentralised systems.
The FSB does not recommend an outright ban - in any case this document’s recommendations are tentative- but it does believe that there is enough risk to warrant such an extreme action. It also recommends cooperation with authorities, though to what degree it does not state.
The recommendation is perhaps somewhat unsurprising, given that several governments across the world are working on Central Bank Digital Currencies (CBDCs) of their own - which global stablecoins may challenge.
However, the implementation of such an order will be difficult, as decentralized systems cannot be shut down. Precisely how the FSB and governments plan to execute such a task has not been described.
While the recommendations may pessimistically shape the outlook of cryptocurrency investors, it is worth nothing that these are simply recommendations and subject to change. Furthermore, the FSB is also aware of the potential for financial innovation, saying
The objective of the recommendations is to help authorities to determine their regulatory, supervisory and oversight approaches to mitigate potential risks to financial stability and market integrity, and risks for users (consumers) that GSCs may pose, while also being supportive of responsible financial innovation.
The FSB is accepting comments until July 15 2020. Final recommendations will be published in October 2020.