Table of Contents
Introduction
Crypto-assets have emerged as a prominent component of the private sector’s digital assets, relying on cryptography and distributed ledger technology. The crypto-asset market comprises various segments, including unbacked crypto-assets like Bitcoin, stablecoins, and decentralized finance (DeFi). These segments are interconnected in a complex and ever-evolving ecosystem, necessitating a holistic approach when evaluating financial stability risks.
Crypto-Assets: Vulnerabilities and Financial Stability Risks
The vulnerabilities in crypto-asset markets mirror those found in traditional finance, encompassing leverage, liquidity/maturity mismatch, operational/technological fragilities, and interconnectedness. These vulnerabilities can have implications for financial stability through different channels:
Financial sector exposures: Financial institutions and entities that are financially impacted by crypto-assets may face risks due to their exposure to these assets and related financial products.
Wealth effects: Changes in the value of crypto-assets can impact their investors, potentially leading to knock-on effects on the financial system.
Confidence effects: Developments in crypto-asset markets can influence investor confidence, not only in these markets but also in the broader financial system.
Use in payments and settlements: The extent to which crypto-assets are utilized in payments and settlements can affect financial stability.
To gain a deeper understanding of these channels and their implications, refer to the FSB’s comprehensive report on crypto-asset markets published in 2018.
Updated Risk Assessment and Regulatory Framework
In February 2022, the Financial Stability Board (FSB) released an updated risk assessment of crypto-assets. The report cautioned that as crypto-asset markets continue to evolve rapidly, they could pose a threat to global financial stability due to their scale, structural vulnerabilities, and increasing interconnectedness with the traditional financial system.
Acknowledging the potential risks, the G20 assigned the FSB the responsibility of coordinating the development of an effective and comprehensive regulatory framework for crypto-assets. In July 2023, the FSB finalized its recommendations for the regulation, supervision, and oversight of crypto-assets and markets. These recommendations also targeted global stablecoin arrangements, which possess characteristics that may amplify threats to financial stability.
To ensure a coordinated implementation of the comprehensive policy framework for crypto-assets, the FSB collaborated with the International Monetary Fund (IMF) to deliver a joint paper. This paper synthesizes the policy findings from the IMF’s work on macroeconomic and monetary issues with the FSB’s work on supervisory and regulatory concerns related to crypto-assets.
Broader Policy Issues and Stablecoins
While the FSB primarily focuses on financial stability risks associated with crypto-assets, stablecoins raise broader policy issues. Some of these issues include:
Consumer and investor protection: Measures should be in place to safeguard the interests of consumers and investors in the context of stablecoin usage.
Market integrity protocols: Strong protocols are necessary to ensure the integrity of stablecoin markets and prevent fraudulent activities.
Anti-money laundering and combating financing of terrorism (AML/CFT): Regulatory frameworks should address AML/CFT concerns and include the implementation of international sanctions.
Prevention of tax evasion: Regulatory measures should be implemented to prevent stablecoins from being used for tax evasion purposes.
Circumvention of capital controls: Measures should be taken to prevent stablecoins from being used to circumvent capital controls.
Facilitation of illegal securities offerings: Concerns exist regarding the potential role of stablecoins in facilitating illegal securities offerings.
These broader policy issues are being addressed at national and international levels, but they lie outside the primary focus of the FSB’s work.
Global Stablecoins and their Characteristics
The term “stablecoin” lacks a universally agreed legal or regulatory definition. Stablecoins are typically created and distributed through trading platforms in exchange for fiat currency. The proceeds from the fiat currency can be used by the stablecoin issuer to invest in reserves or other assets.
The FSB’s 2020 report on “Global Stablecoin” Arrangements identified three characteristics that differentiate a Global Stablecoin (GSC) from other stablecoins and crypto-assets:
Stabilization mechanism: GSCs possess a mechanism to ensure stability, distinguishing them from other stablecoins.
Usability as a means of payment and/or store of value: GSCs are designed to function as a reliable means of payment or store of value.
Potential reach and adoption across multiple jurisdictions: GSCs have the potential to achieve widespread adoption and usage across various jurisdictions.
These characteristics set GSCs apart from other stablecoins and underline the unique risks they pose.
Financial Stability Risks and Regulatory Oversight of Stablecoins
Stablecoins have the potential to enhance payment efficiency and promote financial inclusion. However, if a widely adopted stablecoin with a broad reach across jurisdictions (a GSC) were to emerge, it could attain systemic importance within and across multiple jurisdictions, particularly as a payment medium.
The rise of GSCs may pose challenges to existing regulatory and supervisory oversight. In response to these risks, the FSB has developed ten high-level recommendations, revised in July 2023, to promote consistent, effective regulation, supervision, and oversight of GSCs and stablecoins with the potential to become GSCs. These recommendations aim to address the financial stability risks posed by stablecoins at both domestic and international levels. They also support responsible innovation while allowing jurisdictions the flexibility to implement their own approaches.
The FSB has also outlined additional actions to enhance cross-border payments as part of its roadmap.
Conclusion
Crypto-assets, including stablecoins, have become a significant part of the digital asset landscape. As these assets continue to evolve, it is crucial to assess their impact on financial stability and develop appropriate regulatory frameworks to mitigate risks. The FSB’s work in coordinating global efforts to regulate and supervise crypto-assets and stablecoins aims to address these challenges and ensure a stable and secure financial system.
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