International Regulators Launch New Stablecoin Consultation

October 7, 2021
Stablecoins should observe international standards for payment, clearing and settlement systems, the Committee on Payments and Market Infrastructure and the International Organisation of Securities Commissions have clarified in a new consultation.

Stablecoins should observe international standards for payment, clearing and settlement systems, the Committee on Payments and Market Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO) have clarified in a new consultation.

The CPMI and IOSCO have called for comments on their new report confirming that stablecoin arrangements should be subject to the Principles for Financial Market Infrastructures (PFMI). Originally published in 2012, the PFMI establishes principles to manage risk in the financial market infrastructures. This includes guidance on issues such as transparency and settlement.

Market participants now have until December 10 to respond to the consultation’s nine questions, which cover issues such as systemic governance, interdependencies and settlement finality.

“The payments landscape has undergone rapid transformation in recent years and continues to evolve at pace,” said Jon Cunliffe, the CPMI’s chairperson and deputy governor at the Bank of England.

As financial innovation offers the prospect of new services and greater competition in payments, it also adds potential risks to the financial system.

“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 Cunliffe.

The CPMI’s report is not intended to create standards for stablecoin arrangements, but instead to provide more clarity to both stablecoin arrangements and supervisory authorities that are overseeing them.

Although the report provides guidance on only a subset of principles, a systemically important stablecoin primarily used for making payments would be expected to observe all of the relevant principles, including those principles for which no further guidance is provided in this report, the bodies have confirmed.

The report also omits from covering issues specific to stablecoins denominated in or pegged to a basket of fiat currencies, otherwise known as multi-currency stablecoins. Although it has been confirmed that this could be covered in future work depending on whether the guidance provided here is sufficient enough to provide clarity.

The consultation follows political pressure from international groupings such as the G7, G20 and the Financial Stability Board for standard-setting bodies to establish rules and principles to complement the rise of stablecoins, and their potential financial risks.

In particular, it was the prospect of the Facebook-backed stablecoin, Diem (formerly known as Libra), that caught the attention of financial regulators internationally.

In a speech on Wednesday (October 6), Bank for International Settlements general manager Agustín Carstens warned that the rise of bigtech companies in the payments space could have a negative impact on financial stability and competition.

“Bigtechs' large networks could lead to a rapid and large-scale adoption of stablecoins,” said Carstens, continuing that data from payment transactions would enhance their ability to exploit the so-called data-network-activity (DNA) loop, meaning when bigtech companies benefit from their user data.

This could further concentrate market power in the hands of a few, and threaten financial stability, fair competition and data governance, cautioned Carstens.

Stablecoins could also challenge bank business models, especially if those new instruments affect the demand for banks' deposits, he added. “As alternative sources of bank funding may be more costly and less stable, this would hamper banks' ability to perform their credit intermediation function,” he pointed out.

The same has also been said of central bank digital currencies (CBDCs), with senior officials at institutions such as Germany’s Bundesbank stressing the need for CBDCs not to accidentally deprive banks of a stable source of funding.

Stablecoins further risk fragmenting the monetary system, as they could result in so-called walled gardens, Carstens said. “Funds collected by bigtechs by issuing stablecoins could become quite large and could be moved around rapidly by users, including across borders,” he said.

“In this type of scenario, stablecoins could erode a jurisdiction's monetary sovereignty and its unit of account through Diem-isation, whereby a large platform denominated in foreign currency comes to dominate digital payments,” he said, warning that this could ultimately constitute a new form of dollarisation.

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