29 octobre 2019 Michael Voisin  -  Harry Eddis  -  Richard Hay  -  Sophia Le Vesconte FintechLinks

G7 outlines key risks to be addressed by stablecoin developers and regulators

Stablecoins – particularly global stablecoins, like Facebook’s Libra – pose new and serious risks for the world economy, according to the G7. Its stablecoin working group has released a report on the risks and challenges stablecoin developers and regulators should address. For example, establishing a sound legal basis in all relevant jurisdictions is an “absolute prerequisite”. The FSB is building on this work and will report next year on the adequacy of existing regulatory approaches.

Assessing and addressing regulatory gaps is a G7 priority

At their meeting earlier this year, the G7 Finance Ministers and Central Bank Governors agreed that stablecoins pose serious regulatory risks and require prudent supervision. It is not always clear how stablecoins fit in to existing regulatory frameworks or indeed whether those frameworks are sufficient. And so the G7 prioritised its assessment of possible regulatory gaps for stablecoins and the G7 Working Group on Stablecoins has now released its final report setting out its recommendations.

The failings of existing payment systems

The working group found that current payment systems still have two major failings:

  • Lack of universal access: 1.7bn adults still do not have a transaction account, and this can impede their access to further financial services such as credit, savings and insurance.
  • Inefficiencies in cross-border retail payments: Cross-border payments “remain slow, expensive and opaque, especially for retail payments such as remittances”. 

There is room, therefore, for innovation to improve current arrangements. 

Cryptoassets vs stablecoins vs global stablecoins

Various types of digital payment coin have been emerging in the private sector which seek to address these challenges. The report distinguishes between the following categories:

  • The first wave of cryptoassets (such as Bitcoin) which are not backed by any claims, rights or interests in the real world. These, it finds, have so far proved too volatile and complex to serve as a reliable store of value or means of payment.
  • Stablecoins share certain features of cryptoassets but also represent a claim, either on a specific issuer or on underlying assets or funds, or some other right or interest. It considers stablecoins to have greater potential to improve the efficiency of payments, if designed appropriately.
  • Global stablecoins (GSCs) are those sponsored by large tech or financial firms which have the potential to scale rapidly to achieve a global or other substantial footprint. GSCs pose additional systemic risks on top of those generally applicable to stablecoins and so attract closer scrutiny.
Risks and challenges relevant to all stablecoins

The report identifies a list of legal, regulatory, oversight and public policy issues that developers of all stablecoins, regardless of scale, would need to address, as summarised below. 

  • Legal certainty: “A well founded, clear and transparent legal basis in all relevant jurisdictions is a prerequisite for any stablecoin arrangement”. Relevant issues include legal characterisation (for example, whether it is considered a money equivalent and whether it gives property rights), conflicts of laws and the legal underpinning of the payment system (including, for example, the basis for settlement finality).
  • Sound governance: “Sound governance must be clearly established prior to live operations”. Relevant issues include oversight of third-party providers, establishing appropriate lines of responsibility and accountability in distributed systems, and segregation of reserve assets.
  • Financial integrity (AML/ CTF): “Public authorities will apply the highest international standards relating to virtual assets and their providers with regard to AML/CTF.” The Financial Action Task Force (FATF) has also released a statement on how it will assess implementation of its new standards for virtual assets. 
  • Safety, efficiency and integrity of payment systems: “Regulatory and policy frameworks are expected to remain technology-neutral and not hinder innovation, while ensuring that it is safe and robust”. Inadequately designed payment systems pose various systemic risks. The CPMI-IOSCO principles are one useful source of guidance for addressing these types of risk.
  • Cyber and other operational risk considerations: “Public authorities will require that operational and cyber risks from stablecoins be mitigated through the use of appropriate systems, policies, procedures and controls”. One issue is that the complexities of distributed systems could be a limitation when it comes to operational scalability, for example in ensuring transactions are processed on a real time basis.
  • Market integrity: “A stablecoin arrangement must ensure fair and transparent pricing in both primary and secondary markets”. Under some designs, market makers could have significant market power, leaving room for market abuse. Where stablecoins are linked to a portfolio of assets, knowledge or speculation about rebalancing could also allow for market manipulation. Certain business structures also raise concerns around conflicts of interest.
  • Data protection: “Authorities will apply appropriate data privacy and protection rules to stablecoin operators, including how data will be used by the participants in the ecosystem and shared between the participants and/or with third parties”. Issues can arise in cross-border arrangements where regulatory approaches to data protection differ. 
  • Consumer / investor protection: “As with any nascent technology, additional work may be required to ensure that consumers and investors are informed of all material risks as well as their individual obligations.” If a stablecoin is considered to be a security or financial instrument, the issuer may need to provide a prospectus and those engaged in clearing and settlement may be subject to rules for custodians and clearing agencies, for example.
  • Tax compliance: “Stablecoin operators and users and other relevant parties are expected to comply with applicable tax laws and mitigate potential avoidance of tax obligations”. There remains uncertainty around the legal status, and thus the tax treatment, of stablecoins. For example, if treated akin to payments, transactions in stablecoins could attract sales tax. If treated as a security, on the other hand, tax liabilities may arise when the underlying value of the stablecoin fluctuates relative to fiat currency.
Global stablecoins pose additional public policy challenges

According to the report, the issues above are amplified for GSCs. In addition, it concludes that GSCs pose challenges in the following areas: 

  • Monetary policy: For example, if a GSC is widely used as a store of value, it could (depending on the design) weaken the effect of monetary policy on domestic interest rates. Also, if a GSC, in facilitating cross-border payments, makes it easier to substitute domestic assets for foreign ones, this could further undermine domestic monetary control. The inability to hold sovereign-to-sovereign discussions on monetary policy implications is another challenge.
  • Financial stability: GSCs pose various threats to financial stability. Some threats relate to, and could be addressed by, the ecosystem of the GSC itself. For example, the mechanism used to stabilise the value of a GSC would need to incorporate high standards of financial risk management to address market risk as well as credit and liquidity risk (arising, for example, as a result of exposures under the reserve assets). However, the use of GSCs could also have an impact on the broader financial system and the real economy. For example, if consumers increasingly store their wealth in GSCs, bank deposits may decline. For banks, that could mean a need to switch to more costly and volatile sources of funding. For consumers, that could mean greater exposure to a riskier asset class and the risk of losing substantial portions of their wealth.
  • Fair competition: GSC arrangements could achieve market dominance from, for example, network effects and exponential benefits of access to data. These issues are being considered among competition authorities on a global level.
What’s next?

The report recommends that national authorities align their regulations to international standards (such as the CPMI-IOSCO principles and FATF standards referred to above) and apply these standards to stablecoin arrangements.

The Financial Stability Board has announced that it will build on the work of the G7 working group to take stock of existing regulatory approaches and consider whether they are adequate and effective in addressing financial stability and systemic risk concerns. It will report on possible multilateral responses to the G20 Finance Ministers and Central Bank Governors in April 2020.

The G7 report also encourages ongoing work in the public sector to improve current payment systems. It invites central banks, finance ministries and standard-setting bodies to develop road maps for improving efficiencies in payments. Central banks will also continue to assess the relevance of issuing central bank digital currencies.