Crypto-assets and Global “Stablecoins”
Crypto-assets are a type of private sector digital asset that depends primarily on cryptography and distributed ledger or similar technology. The different segments of crypto-asset markets – including unbacked crypto-assets (such as Bitcoin), so-called “stablecoins”, and decentralised finance (DeFi) – are closely interrelated in a complex and constantly evolving ecosystem, and need to be considered holistically when assessing related financial stability risks.
The vulnerabilities in crypto-asset markets – relating to leverage, liquidity/maturity mismatch, operational/technological fragilities and interconnectedness – are similar to those in traditional finance. These vulnerabilities might have implications for financial stability through different channels: (i) financial sector exposures to crypto-assets, related financial products and entities that are financially impacted by crypto-assets; (ii) wealth effects, i.e. the degree to which changes in the value of crypto-assets might impact their investors, with subsequent knock-on effects on the financial system; (iii) confidence effects, through which developments concerning crypto-assets could impact investor confidence in crypto-asset markets (and potentially the broader financial system); and (iv) extent of crypto-assets’ use in payments and settlements. These channels are discussed in more detail in the FSB’s report on crypto-asset markets in 2018.
In its February 2022 report, the FSB noted that crypto-assets markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system. The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage. Although the extent and nature of use of crypto-assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.
Crypto-assets also raise broader policy issues, such as the need for consumer and investor protection; strong market integrity protocols; anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, including implementation of international sanctions; regulatory measures to prevent tax evasion; the need to avoid circumvention of capital controls; and concerns relating to the facilitation of illegal securities offerings. These are the subject of work at national and international levels and are outside the primary focus of the FSB’s work.
So-called “stablecoins” are a specific category of crypto-assets that aim to maintain a stable value relative to a specified asset (typically US dollars), or a pool or basket of assets, and provide perceived stability when compared to the high volatility of unbacked crypto-assets . However, relative price stability may not be the case for all stablecoins owing to variations in the ways in which they are pegged, the nature of reserve assets (if any), and their governance structure.
Stablecoins are generally created, and distributed through trading platforms, in exchange for fiat currency. The issuer of a stablecoin can use the proceeds of the fiat currency to invest in the reserves or in other assets. The composition and amount of reserve assets backing the stablecoin may vary significantly, some issuers do not appear to adhere to any standards regarding the composition of reserve assets backing the stablecoin, and there may be no direct right by a user against the issuer or reserve to redeem. As a result, the risks of various stablecoins might differ based on their design, including their reserve assets and redemption rights.
Stablecoins have the potential to bring efficiencies to payments, and to promote financial inclusion. However, a widely adopted stablecoin with a potential reach and use across multiple jurisdictions (a so-called “global stablecoin” or GSC) could become systemically important in and across one or many jurisdictions, including as a means of making payments.
The emergence of GSCs may challenge the comprehensiveness and effectiveness of existing regulatory and supervisory oversight. The FSB has agreed on 10 high-level recommendations that promote coordinated and effective regulation, supervision and oversight of GSC arrangements to address the financial stability risks posed by GSCs, both at the domestic and international level. They support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches.
The recommendations call for regulation, supervision and oversight that is proportionate to the risks. Authorities agree on the need to apply supervisory and oversight capabilities and practices under the “same business, same risk, same rules” principle.
Further actions have been agreed – and will be implemented – as part of the FSB’s roadmap to enhance cross-border payments.