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 February 2022, the FSB published an updated risk assessment of crypto-assets. The report warned that crypto-asset 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 G20 charged the FSB with coordinating the delivery of an effective and comprehensive regulatory framework for crypto-assets. In July 2023, the FSB finalised its recommendations for the regulation, supervision and oversight of crypto-assets and markets and its recommendations targeted at global stablecoin arrangements, which have characteristics that may make threats to financial stability more acute
Additionally, The FSB has also delivered a joint paper with the IMF that synthesises the policy findings from IMF work on macroeconomic and monetary issues and FSB work on supervisory and regulatory issues associated with crypto-assets. The paper includes a roadmap to ensure effective, flexible, and coordinated implementation of the comprehensive policy framework for crypto-assets.
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.
There is no universally agreed legal or regulatory definition of stablecoin.
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 FSB’s 2020 report, Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements described three characteristics that distinguish a GSC from other crypto-assets and other stablecoins. Those characteristics include:
the existence of a stabilisation mechanism,
the usability as a means of payment and/or store of value, and
the potential reach and adoption across multiple jurisdictions.
The first two characteristics (the existence of a stabilisation mechanism and usability as a means of payment and/or store of value), and the unique risks that these characteristics pose, distinguish stablecoins from other crypto-assets. The third, the potential reach and adoption across multiple jurisdictions, differentiates GSCs from other stablecoins.
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, which were revised in July 2023, that promote consistent and effective regulation, supervision and oversight of GSCs and stablecoins with the potential to become GSCs across jurisdictions to address the financial stability risks they pose, both at the domestic and international level. The recommendations support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches.
Further actions have been agreed – and will be implemented – as part of the FSB’s roadmap to enhance cross-border payments.