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G7 report: global stablecoins are a systemic risk

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There have been several reports on cryptocurrencies by the Bank of International Settlements (BIS). All of them said that they were not yet sufficient in scale to represent serious risks.

Today’s G7 Working Group Report on Stablecoins, produced by the BIS, represents a change of tune. Global stablecoins such as Libra represent a systemic risk. The BIS defines a global stablecoin (GSC) as an initiative built on an existing large customer base with the potential to scale rapidly.

Among a broad range of risks, four are highlighted. The first is the impact on how countries can influence their own monetary policy. A related point is that in some countries, the stablecoin could be attractive to citizens, resulting in monetary substitution and financial instability. The G7 report references one of Benoit Coeuré’s (chair of the working group) speeches, which made the same conclusion in July.

Regulatory concerns, namely anti-money laundering (AML) and counter-terrorism financing, are the topics that have previously grabbed attention. But one that is coming to the fore is the need for open competition and concern over antitrust issues. After all, the user bases of a Facebook or an Alibaba dwarf that of the world’s largest banks.

If citizens moved from fiat currency to privately run stablecoins, then services like loans and the sale of bonds would naturally move to stablecoins too. Fluctuations in its value may cause both businesses and people to lose out. And the report suggests that GSCs are more fragile than sovereign currency, hence more likely to see fluctuation.

For instance, a GSC is more likely to be backed by a basket of currencies from strong economies. Nations not included in the basket may see citizens move to the GSC, even for savings, because of its perceived strength. So the effectiveness of the country’s central bank and monetary policy would reduce.

A similar point was made by Jason Furman at the IMF this week; most people use currency for domestic purchases. But if a stablecoin is backed by foreign currency, people’s money could have a different purchasing power every day.

The G7 report compares this possibility to a ‘new dollarisation’, with similar effects but higher risk due to the inability to make sovereign-to-sovereign policy discussions. Governments can communicate with one another if a kind of ‘dollarisation’ happens, but what if the issuer of the currency is a big tech firm?

To mitigate these risks, G7 concludes that some existing regulatory frameworks could apply to GSCs. There are AML, data protection, and consumer protection systems in place for physical cash, which behaves similarly to cryptocurrencies.

But the main challenges in regulation are cross-border cooperation and, crucially, that not all stablecoins are created equal. The design, issuance, and value vary from project to project, and adapting laws to each one is no mean feat.

One ‘positive’ to come out of the urgent work needed is the development of cross-border payments. The report finishes by admitting that stablecoin projects have highlighted the inefficiencies of international transfers. It recommends that financial institutions do more to improve such payments and financial inclusion.

Though the report states that central bank digital currencies (CBDCs) are “promising” for cross-border payments, it is less enthusiastic about them for consumers.

Citing a January survey from the BIS, it reads: “very few are likely to be issued in the short or medium term”. While 70% of central banks are working on CBDCs, around 80% “do not have the legal authority to issue a CBDC, or are uncertain if they do.”

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