FSB outlines 10-point plan for stablecoin risks

Some powers already exist but stablecoins may cut across regulatory boundaries, report says

The Bank for International Settlements, Basel
Ulrich Roth

The Financial Stability Board is consulting on 10 recommendations for regulating and overseeing global stablecoins of the sort envisaged by Facebook’s libra project.

A document published today (April 14) sets out the findings of an FSB “stocktake” and gives guidance on how jurisdictions should tackle possible financial stability risks emanating from the new platforms.

Stablecoins have some features of fiat currencies, some of payment systems and some of banks. They are designed to allow users to hold digital assets whose value is pegged to a basket of more traditional assets, such as major currencies. Theoretically, this then allows users to make low-cost payments across borders, with the risk of major fluctuations in value remaining limited.

The FSB stocktake found “that existing regulatory, supervisory and oversight regimes generally apply in whole or in part to stablecoin arrangements and address at least some of the risks they generate”.

But, the FSB notes, stablecoins also throw up some unique challenges for regulators. As they may cross the boundaries of many different financial sectors – banking, payment systems, securities markets – different regulators may need to work together on their oversight. Existing frameworks are often designed on a sectoral basis and may need to be rethought. Risks also spill across borders.

Furthermore, the FSB highlights some unique risks that stablecoins pose: “governance challenges” from their decentralised nature; market, liquidity, and credit risks from their redemption or stabilisation arrangements; and operational or cyber risks from their underlying technology.

“Relevant authorities should, where necessary, clarify regulatory powers and address potential gaps in their domestic frameworks to adequately address risks posed by global stablecoins,” the FSB says.

The Basel-based body sets out 10 “high-level recommendations” for managing stablecoin risks. Authorities should “have and utilise” the necessary powers to “regulate, supervise and oversee” stablecoins. Regulations should be applied “on a functional basis” and proportionate to the risks. Authorities should co-ordinate across borders to share information and ensure comprehensive regulation and supervision.

Stablecoin issuers should be required to have in place a “comprehensive governance framework”. They should also have strong risk management arrangements, put in place systems to safeguard data, and develop recovery and resolution plans.

Authorities should demand transparency from stablecoin issuers when dealing with users and other stakeholders, and should ensure legal rights are clear when it comes to redemption. Lastly, authorities should require an issuer to meet all necessary regulatory and supervisory requirements of a jurisdiction before launching its products there.

The 10 recommendations “call for regulation, supervision and oversight that is proportionate to the risks, and stress the need for flexible, efficient, inclusive, and multi-sectoral cross-border co-operation, co-ordination and information-sharing arrangements”, the FSB says.

Interested parties have until July 15 to comment on the proposals.

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