STABLECOINS: Key Principles for Financial Market Infrastructures and other Stabilizing Mechanisms
With the emergence of stablecoins, and because of their potential impact on the financial system, the G7, the G20, and the Financial Stability Board (FSB) called upon the standard-setting bodies for revisions of standards and principles, as well as additional guidance to supplement existing principles as needed. International Organization of Securities Commissions (IOSCO) and Committee on Payments and Market Infrastructures (CPMI) are two of these standard-setting organizations. They jointly released the Application of Financial Market Infrastructure Principles to Stablecoin Arrangements as a regulatory guide in order to apply the Principles for Financial Market Infrastructures (PFMI) to stablecoin arrangements (SAs), including the entities integral to such arrangements.
The guidance emphasizes that if a stablecoin performs a transfer payment function and regulators deem it important to the financial system, it should comply with all relevant principles in the Principles for Financial Market Infrastructures (PFMI). The purpose of the application is to offer recommendations on how to apply the principles of financial market infrastructure to SAs that are considered the systemically significant for that infrastructure.
Despite the functional approach that leads to the classification of SAs as financial market infrastructures, they may offer certain distinguishing characteristics which are:
1)The use of stablecoins to settle assets that may not be in the form of commercial or central bank money
2) relationships between several SA functions and their interdependencies
3) Use of distributed or automated technical protocols such as distributed ledger technology
4) encouragement of decentralization of administration and operation.
When applying the concepts of financial market infrastructure to systemically important SAs, CPMI and IOSCO feel that providing guidance on these features will be helpful to SAs and the appropriate authorities. The guidance elaborates on the following aspects:
SAs should have effective governance structures. Clear and direct lines of responsibility and obligations are possible by the ownership structure and operations of SAs and require timely human intervention when necessary.
SAs should create the necessary structures and instruments for risk management. It should evaluate all of its risks, and determine appropriate mitigation strategies.
Regardless of the operational settlement mechanism used, systemically Important SAs should offer a clear and definitive final settlement at least by the end of the Value Date. Such settlement shall be made available on an intraday or real-time basis as required or desired.
Systemically important SAs should assess whether stablecoins are an acceptable alternative to using central bank money and whether the credit and liquidity risks of their stablecoins utilized for money settlement are minimal and properly monitored.
Stablecoins may not be perfect in areas outside the purview of the PFMI. The PFMI does not address aspects such as competition, consumer protection, data privacy, anti-money laundering, or countering the financing of terrorists and Stablecoins may have deficiencies in these aspects. Additionally, stablecoins could create a disjointed and unstable monetary system by interacting with cryptos and Defi.
The CPMI and IOSCO will continue to work with other standard-setting groups and look into regulatory, supervisory, and oversight problems related to stablecoin arrangements in the future.
CBW - External Analyst