Today the BIS and IOSCO published a report and launched a consultation on systemically important stablecoins. This is a follow-up to a G20 report on cross border payments and the regulatory activity triggered when Facebook first announced plans for the Libra stablecoin, now Diem. Feedback is requested by December 1.
At this stage, the organizations are not imposing new rules for stablecoins. However, they provide preliminary guidance for how systemically important stablecoins should comply with Principles for Financial Market Infrastructures (PFMI) rules. In other words, big stablecoins should be regulated like major payment systems.
“This consultation document is part of an ongoing commitment by the international regulatory community to ensure the principle of ‘same risk, same regulation’, to identify potential risks and to help develop appropriate oversight to safeguard financial stability,” said Sir Jon Cunliffe, Chair of the CPMI and Deputy Governor at the Bank of England
The paper outlines how the PFMI would apply to stablecoins. For example, while decentralized governance is rising,the rules require clear governance and identifiable owners.
A key focus is to prevent a stablecoin issuer defaulting, so there’s an emphasis on credit and liquidity risks. Stablecoin holders need to have clear claims against the assets and the stablecoin issuer. There needs to be “sufficient’ backing of adequate quality assets, and these assets should be possible to sell at close to market value. Of course, if there were a run on a systemic stablecoin, that could potentially impact market prices which could have far broader implications. Managing this “run” risk is one of the aims of the rules.
A nuance in the paper is its reference to ‘stablecoin arrangements’. So it’s not just the issuer but also the institutions operating settlement accounts and the custodians of reserve assets. These ancillary institutions have to be sufficiently capitalized and creditworthy, and custodians need to segregate assets clearly.
Another area that is particular to stablecoins and many public blockchains is settlement finality. Blockchains such as Ethereum have probabilistic settlement. In other words, there is a small possibility that a blockchain could split or fork, or blocks that include transactions could be reverted. The paper suggests that for stablecoins, when a transaction is considered final needs to be clearly communicated and stablecoins need to address the “misalignment between technical settlement and legal finality”.
This paper is purely preliminary guidance and the organizations are keeping the door open to issue further suggestions on stablecoins, particularly as the marketplace evolves. One could read between the lines that they want to see what happens when Diem launches.
The focus of the paper is very much about regulating stablecoins as payment instruments. Europe’s MiCA regulations plan to regulate stablecoins e-money, which would limit stablecoins to payments in many jurisdictions. A key aspect not covered in today’s paper is the exponential growth in a material second use case for stablecoins during the last 15 months. That’s its use as a lending instrument in the cryptocurrency sector.