Two years ago the Financial Stability Board (FSB) made high level recommendations for the regulation and oversight of global stablecoin (GSC) arrangements which were endorsed by the G20. Today it updated those GSC recommendations and published a similar guidance list for crypto-assets, requesting feedback.
The FSB’s analysis found most stablecoins don’t comply with the recommendations and says they need to improve their governance, risk management, redemption rights, stabilization mechanisms and disclosures.
Some updated recommendations are informed by the crypto crash triggered by the collapse of the Terra stablecoin and the temporary de-pegging of the largest stablecoin, Tether.
For example, the FSB is particularly concerned about wallet providers and if there was a loss of confidence in a wallet provider and its ability to protect keys. That could have a knock-on effect on the stablecoin.
Currently, the largest wallet providers are cryptocurrency exchanges, and our observation is that some of the exchanges are associated with specific stablecoins. For example, Coinbase with USDC and Binance with BUSD. But to our knowledge, the issuance is separated from the exchanges. USDC is issued by Circle and BUSD by Paxos.
The FSB is concerned that wallet providers may also be involved in stablecoin issuance and provide off-chain transfers without sufficient safeguards.
Another concern relates to governance. The FSB wants to see identifiable legal entities or individuals who take responsibility for the global stablecoin’s operation. That would make decentralized stablecoins tricky. If multiple entities are involved or the stablecoin spans jurisdiction, the governance needs to clarify the liabilities of each.
FSB crypto-asset recommendations
Turning to crypto-assets, the FSB created a list of recommendations, which have been significantly summarized below. Much like the stablecoin recommendations are relevant to so-call global stablecoins, many crypto-asset recommendations are expected to be implemented proportionately to the size of a service provider or issuer.
The FSB has opened a consultation and looking for feedback by December 15.
The FSB Crypto-asset recommendations are:
- Authorities need powers, tools, resources to oversee crypto markets, issuers and services providers
- Authorities should apply “same activity, same risk, same regulation.”
- Authorities need to coordinate domestically and internationally.
- Crypto-asset issuers and services providers need governance frameworks.
- Crypto-asset service providers need to have effective risk management.
- Crypto-asset issuers and service providers need to have frameworks for data collection.
- Crypto-asset issuers and service providers need to have appropriate risk, financial condition and product disclosures.
- Authorities need to identify and monitor interconnectedness within the crypto-asset ecosystem and between the ecosystem and TradFi.
- Authorities need to ensure multi-function service providers address the risks of each activity individually and in combination.
