How can the FSB's recommendations on the regulation of global stablecoins affect the crypto market?

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The Financial Stability Board (FSB), the supervisory body of the G20,   issues an advisory report with 10 "high-level" recom...

The Financial Stability Board (FSB), the supervisory body of the G20,  issues an advisory reportwith 10 "high-level" recommendations on the regulation of global stablecoins. Among them there are those that can cause alarm in the crypto community. The document, although only of an advisory nature, shows that regulators around the world are strongly opposed to stable digital coins and are ready to act in a coordinated manner in the fight against them. Therefore, the organization calls on national regulators to close the gaps in legislation and adhere to uniform principles in the supervision of stablecoins. Issuers and stablecoin operators must comply with the same requirements as banks. At the same time, if the authorities cannot control and regulate fully decentralized stablecoins, they can ban them. In the material, we understand the FSB recommendations and that

The role of FSB recommendations in the global economy

The Financial Stability Council was established at the initiative of the G20 countries   in April 2009. The organization is funded by the Bank for International Settlements (BIS). Its members are representatives of the ministries of finance and central banks of all G20 member states, as well as ten international organizations, including the IMF, ECB, World Bank and European Commission.
The main task of the organization is to identify weaknesses in the world economy and its stability, develop regulatory and supervisory policies in this area. One of the main challenges is to monitor the systemic implications of financial technology innovation and systemic risks arising from central bank failures. Global stablecoins, which can be used in cross-border payments without the intermediation of the Central Bank, are precisely capable of leading to such failures.
The released FSB report is a response to the G20's instructions to develop recommendations for regulating stablecoins, given last June and February this year. Formally, FSB recommendations have no legal force - regulators are not obliged to comply with them. In practice, however, the organization has enormous influence, and its recommendations have a significant impact on the development of international standards for oversight and regulation.

What the FSB sees as threats from stablecoins

Earlier, DeCenter wrote that in October last year, the G7 working group on stablecoins, the Bank for International Settlements (BIS) and the Financial Stability Council, as well as the Swiss regulator FINMA, together with representatives of central banks and the IMF, sharply criticized stablecoins.
Regulators believe stablecoins pose a threat to the global economy. Due to their advantages, they can become widespread, which will lead to unpredictable consequences. Therefore, stablecoins must comply with FATF standards. Regulators pay the closest attention to the global stablecoinLibra from Facebook. The project was opposed by both American and European financial authorities. But Facebook hasn't given up on its plans and has even launched the main network.
The FSB Report is a voluminous 67-page document. In it, the organization details the risks that stablecoins carry to global financial stability. There is nothing fundamentally new in the report in comparison with the previous findings of the regulators, but some points are explained in more detail.
Thus, the authors of the report consider stablecoins as part of the problem of cross-border payments. The document emphasizes that one of the main advantages of stablecoins - the ability to freely make transactions - is at the same time a serious threat to financial stability. Digital tokens that aspire to be payment surrogates can gain widespread international distribution because they cover needs not met by existing cross-border payment systems.
The document notes that if international payments became faster, cheaper and easier, the advantages of stablecoins over traditional money transfer methods would be noticeably reduced. However, without proper regulation and restrictions, stablecoins are likely to develop faster than any coordinated initiatives of national regulators, much more inert than independent crypto startups.
If a stablecoin is attractive to a wide range of people from among users in different jurisdictions, its user base can grow rapidly and it can become global. Individual jurisdictions may not be able to adequately control the adoption of stablecoins and assess the materiality of the risks from their use. Therefore, ideally, you need to create a monitoring system for the use of stablecoins at the global level.
The document outlines the difference between regular and global stablecoins:
  • The former are limited to one jurisdiction and are not very popular. Therefore, the risks associated with their use are not very high. However, this may change if stablecoins are used more frequently.
  • The latter are distinguished by the possibility of mass use and adoption in various jurisdictions. They are the most dangerous for global financial stability and their regulation is mainly devoted to the report.
However, this focus on global stablecoins is understandable. Projects like Libra are initially targeted at a billion-dollar audience. Given all the advantages of such cryptocurrencies, we can say for sure that they are able to gain popularity very quickly. This is too risky for the stability of the global financial system.
Hence the biggest problem - capital controls. If global stablecoins become popular, central banks may lose leverage on the economy, and the financial market will become dangerously concentrated. If global stablecoins are used as a common store of value, even moderate price fluctuations could result in significant loss of funds among their users and “ have a destabilizing effect”  on banks. These risks are most relevant to emerging markets and economies in which stablecoins can replace local fiat currencies.
The FSB is also concerned about the underlying stablecoin infrastructure. As stated in the document, most of the technologies and processes used by stablecoins have not been tested on a really large scale. They may still have hidden vulnerabilities that will only appear after mass distribution. The authors of the report believe that due to the weak scalability of their blockchains, the massive distribution of stablecoins can lead to delays in payments and disruptions in transactions. This is unacceptable for the real economy.
Another potential problem with using stablecoins, according to the FSB, is that in a tough macroeconomic environment - like the current coronavirus pandemic - global stablecoins could create a sort of hybrid retail repo market   for US dollars. This will expand the opportunities for access to the US currency, but the process will not be under the control of the Fed and central banks.
The authors of the document also note that the indicated risks may be inherent in other cryptocurrencies with comparable coverage and opportunities for use - the organization hints at bitcoin and other popular cryptocurrencies.

How FSB recommends regulating stablecoins

The purpose of the FSB's recommendations is to help the authorities determine how to mitigate the potential financial risks posed by global stablecoins. The authors of the report note that the existing KYC / AML norms are fully or partially applied to stablecoins and neutralize some of the above risks from their use. But not all of them.
FSB experts emphasize that national regulators must monitor the rapid pace of innovation in the digital asset space and try to anticipate any risks before these assets launch and become popular. The organization called on national regulators to close any possible gaps in the legal regulations of different countries in relation to stablecoins and to develop common international standards for the regulation of these assets. To do this, the FSB suggests following the following ten guidelines.
  • The authorities should have all the necessary powers and instruments for the comprehensive regulation and control of global stablecoins.
  • Stablecoins should be subject to the same regulations and rules as other similar assets with an appropriate level of risk, regardless of the technology used.
One of the main principles of the recommendations is “The same business - the same risks - the same rules”. This means that stablecoin issuers can no longer operate in the gray zone - they will have to adhere to the same rules as banks, e-money issuers and large payment systems. If central banks decide that specific stablecoin mechanisms meet the definition of a “systemically important payment system,” then they also fall under the  Principles for Financial Market Infrastructures (PFMI ) - international standards for financial market infrastructures such as payment systems. And this is an even greater level of responsibility.
  • The authorities should ensure comprehensive control over international transfers of stablecoins.
To do this, regulators of different countries must work closely with each other, preventing the issuers of stablecoins from changing jurisdictions. Thus, stablecoin issuers will not be able to simply take and "escape" to a more favorable jurisdiction.
  • Regulators must establish a comprehensive stablecoin oversight system.
The authors of the report make an important clarification: the degree of decentralization of global stablecoins is not important. Both decentralized and centralized stablecoins should be regulated in the same way. In this case, all stablecoins must receive permission to launch. If the G20 countries agree to these prescriptions (and most likely they will), it could end the legal existence of many decentralized stablecoins, for example, based on Ethereum. The DeFi industry has no better prospects either.
  • Stablecoin operators must effectively manage all possible risks, be protected from cyber attacks, and comply with KYS / AML regulations.
  • Authorities must ensure that data is securely collected and stored from stablecoin issuers, and issuers must provide regulators with “timely and unhindered access to relevant data and information” on all transactions and users.
The mechanism is the same as in the work of traditional banks. Here, of course, the question remains open to what extent the issuers and operators of stablecoins can technically do this. Apparently, wallet addresses and transaction information will not be enough - all KYC data must be provided. Apparently, in this case, the authors of the document clarify that regulators should be able to completely ban decentralized systems.
  • Issuers must develop and comply with procedures for resolving conflicts with users established in accordance with legislation.
  • All information about the issuers of stablecoins, the issue of coins, their support and the specifics of their work should be open to both regulators and the common user.
  • Issuers must ensure that the stablecoins are backed by the declared assets.
  • Before allowing stablecoins to be launched within a particular jurisdiction, authorities must ensure that the coins comply with all regulatory requirements. Otherwise, they can be disabled.
The last recommendation may well be understood as follows: if a stablecoin issuer wants to sell a coin to citizens of the G20 member states, he will need to obtain licenses and register with the relevant authorities in each country. For Tether, Circle, Paxos, Binance and other stablecoin issuers, this can make life much more difficult.
The suggested guidelines should apply to existing stablecoins like Tether and future ones, including central bank digital currencies (CBDCs). Note that, according to a   BIS study , 80% of central banks are already working on launching such CBDCs.
The current version of the FSB recommendations is preliminary, it is open for public comment until July 15 this year. The final version, taking into account the received comments and feedback from 68 participating organizations, will be presented in October 2020.

How FSB recommendations can affect the crypto market

Last year, stablecoins became one of the market drivers: the volume of stablecoin transactions is growing, the crypto community is increasingly feeling the need to use them, financial giants are fighting for the opportunity to be the first to present their own stablecoin - Facebook almost managed to launch its Libra.
This year, stablecoins can further strengthen their position in the market. During the crisis, they show that they live up to their name and remain a “safe haven” even during times of significant volatility. At the same time, traders can use them to exit turbulent positions. So, during the March market decline, when most of the market fell to 50%, the total market capitalization of most stablecoins  increased significantly  - USDT, USDC and BUSD, among others, dramatically increased in the number of coins issued and capitalization. According  to  Genesis Capital, demand for stablecoins grew from 9.6% in Q1 2019 to 37.2% in Q4 2019.
Stablecoins are a critical component of the current cryptocurrency ecosystem. The main merit of assets is the improvement of market liquidity. Stable coins allow traders to stay out of fiat once again, saving time and money. Despite the fact that they provide only a few percent of the total cryptocurrency market capitalization, they account for up to two-thirds of the total trading volume.
The more weighty stablecoins become, the more attention regulators pay to them. They had a choice: to allow stablecoins to remain intra-exchange profit-taking, banning them from the retail market, or to fight them inside exchanges. They obviously chose the latter.
If the G20 countries heed the FSB's advice, the stablecoin market could change significantly. The costs of following all of the above guidelines are enormous. This could ultimately leave banks as the sole issuer of fiat-backed digital currency. The liquidity of crypto assets will be significantly reduced. Exchanges and institutional lenders that use stablecoins the most will be hit hard. The DeFi sector, which is heavily dependent on stablecoins, will have a hard time. The attention of regulators to projects like Libra will become even more intense.
However, given the speed of legislative changes, the adoption of the FSB recommendations and their impact on the crypto market could drag on for several years. In the meantime, central banks and other regulators can be expected to strengthen international cooperation with the aim of achieving greater oversight of issuers and operators of stablecoins.
The crypto industry is slowly getting what it has long been asking for - regulatory clarity. The work will become harder, but the rules will become clearer.
The good news is that stablecoins are not banned. Yes, regulators are trying to drive them into the framework of the traditional financial world, but, provided that all the requirements are met, they do not talk about their ban. This means that the future is recognized for this industry. However, with the current interpretation of the position of regulators, stablecoins run the risk of turning into another version of electronic money.

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