As published on bravenewcoin.com, Friday 17 April, 2020.
The G20’s Financial Stability Board has identified multiple systemic threats to global financial systems should stablecoins be “widely adopted.”
Created in the wake of the 2008 global financial crisis, the G20’s Financial Stability Board (FSB) is tasked with maintaining global financial stability through the coordination of national financial authorities like the Federal Reserve, SEC, and Treasury in the US, as well as the Bank of England and Financial Conduct Authority in the UK.
Specifically, the FSB develops regulatory, supervisory and other financial sector policies and promotes the implementation of these policies across sectors and jurisdictions.
While the FSB has maintained a watchful eye on cryptocurrencies, it was the announcement of Facebook’s proposed Libra coin in June 2019 that made them take notice. The potential for mass adoption led the FSB to examine regulatory issues related to what it termed "global stablecoins," (GSCs) and provide the G20 with a response.
"So-called ‘stablecoins’, like other crypto-assets, have the potential to enhance the efficiency of the provision of financial services, but may also generate risks to financial stability, if they are adopted at a significant scale," states the consultative document. Alongside Libra, the FSB has also identified Tether (USDT), Dai (DAI), TrueUSD (TUSD), Paxos Standar (PAX), Everex (EVX), 1SG (1SG), USD Coin (USDC), and Stable USD (USDS) as potential global stablecoins.
Although the FBS describes the potential risk from stablecoins as “currently contained,” this is largely due to the relatively small scale of their operations. The report warns that systemic risks exist if any stablecoin was to gain a significant foothold as a means of payment or store of value across multiple countries.
The report identifies three dominant concerns. The first is volatility. Although a fundamental purpose of stablecoins is to be a counter to the extreme volatility that dominates the crypto economy, they have not been entirely immune to it. The price of market leader Tether, for example, dropped as low as 80 cents US in some markets in October 2018.
The FSB’s concern is that holders of a global stablecoin may be using it as a store of value, which could result in significant fluctuations of a holder’s wealth in the event of any volatility in the coin’s price. The report says that such wealth effects may be sizable enough to affect spending decisions and economic activity, particularly in Emerging Markets and Developing Economies (EMDEs), where the FBS says the use of a GSC is more likely given the weakness of the local currency.
Also of concern is the underlying infrastructure of a stablecoin. As they are not sovereign currencies, the FSB says there is no guarantee to how well equipped a GSC’s infrastructure would be, and how well they would deal with operational disruptions or failure. Using Tether as an example again, the events of October 2018 included the giant Bitfinex exchange disabling withdrawals and deposits of USDT after its relationship with Noble Bank broke down. The move panicked the markets - and the knock on effect was extreme volatility for Tether prices, and heightened fears about the overall health of the stablecoin sector.
Finally, the FSB sees it as inevitable that stablecoins will integrate into the mainstream economy, with existing financial institutions perhaps engaging with GSCs as resellers, wallet providers and custodians of assets. The FSB warns that a GSC failure might expose financial institutions to adverse confidence effects that would impact the wider economy.
In its report to the G20, the FSB says that risks span the banking, payments, and securities/investment sectors internationally, and particularly in countries with less sophisticated regulatory frameworks and monitoring.
The Board recommends member countries act now to implement effective regulation and supervision. Member organizations like the US Treasury, the SEC, China’s Ministry of Finance and the UK’s Financial Conduct Authority should start treating stablecoins in the same way they would treat any financial services business that attempted to establish itself within their jurisdiction.
G20 members should cooperate with each other to ensure that stablecoins could not easily relocate operations to less demanding jurisdictions. As the current class action lawsuits against Tether and MakerDao illustrate, merely locating a business in the Cayman Islands offers no protection from legal action - particularly when one’s primary place of business is within the United States (California in the MarkerDao example). Although the Maker and Tether suits are civil actions, the FSB report serves to remind financial authorities globally that they have the power of the state behind them, and that they should not hesitate to apply that power.
The FSB has invited feedback about its recommendations from member states and will issue its final report on GSCs in October 2020.