The Financial Stability Board (FSB) has warned governments that “global stablecoins” entering the mainstream financial system through cross-border mass use could pose a risk to financial stability. To mitigate this, the agency said countries should work to prevent “regulatory arbitrage and harmful market fragmentation” in the stablecoin area.
The emergence of global stablecoins (GSCs) would pose greater risks to financial stability than existing stablecoins, the report says, and it could also “reduce the completeness and effectiveness of existing regulatory, supervisory and regulatory- and challenge supervisory approaches.“
The FSB report states that
“Ensuring adequate regulation, oversight and oversight across sectors and jurisdictions will be necessary to avoid potential loopholes and avoid regulatory arbitrage.”
Under the leadership of the US Federal Reserve Governor and Deputy Chairman Randal K. Quarles, the FSB is an international organization established by the G20 countries in 2009 to monitor the global financial system and make recommendations. The organization currently consists of central bankers and government officials of the world’s largest economies, as well as a number of international organizations.
In the report entitled * Regulation, supervision and monitoring of “global stablecoin” agreements *, the FSB further claimed that the current generation of stablecoins is still not used for payments “on a significant scale”, which for the time being threatens them less.
However, the report also noted that “vulnerabilities” in the stablecoin and digital asset space have increased over the course of 2020 and 2021. In particular, he warned that increased participation of retail investors in the digital asset market “could lead to broader problems of financial stability through an erosion of confidence in the financial system.”
This new report comes after the international body published its “high-level recommendations” for governments to regulate global stablecoins last year. The recommendations that still apply today included, among other things:
- Ensuring that authorities have “the necessary powers and instruments, as well as adequate resources, to fully regulate, monitor and supervise global stablecoins”;
- Ensuring cooperation and coordination between authorities “both domestically and internationally”;
- Ensure that global stablecoins have systems for “collecting, storing and protecting data”.”
Since the publication of the recommendations, the FSB noted that the market capitalization of existing stablecoins, along with the broader crypto market, has continued to rise to a level of about $ 123 billion as of September 2021.
Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) were named as the most important USD-linked stablecoins in the report, while EURS was named as the leading Euro-linked stablecoin.
Source: Regulation, supervision and oversight of “global stablecoin” agreements, FSB
However, the report states that the functions of the existing stablecoins remain “limited” as of now, as they are mainly used for investments in “speculative crypto assets”.”
“Nevertheless, this dynamic in which stablecoins can help facilitate speculation with crypto assets and DeFi structures (decentralized financing) with increasing participation of retail investors, raise broader issues of confidence in the financial system as a whole”the FSB wrote.
Finally, the Agency appointed by the G20 stated that it would “continue to support” the implementation of its high-level recommendations and that by July 2023 it would have completed a review of its recommendations in coordination with other relevant international organisations.