The Need for Global Stablecoin Standards
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View Membership BenefitsMoney has taken different forms throughout history. However, one basic rule remains constant through technological and economic change. If something is accepted and used as a means of exchange, then there must be trust in the money itself and the institution behind it to provide a guarantee of its value. Users must have the confidence it will continue to be accepted as money.
History has demonstrated time and again that when that confidence is broken, and users no longer trust the stability of money, the inevitable consequence is a costly, destabilizing and often immediate run.
This rule applies to current forms of fiat money — banknotes and coins — and the commercial bank money that sits in our bank accounts. It also applies to cryptocurrencies seeking to be used as money, whether for transactions with other cryptos or in the wider retail world. This was evident from the turbulence in crypto markets in recent weeks.
The disruption faced by Tether and Terra, while no doubt very painful for many of those involved, was not a systemic event. The impact was contained and did not spill over to impair wider confidence in money or finance. But it is a lesson for the future. It underlined the speed with which confidence can be eroded and the potential volatility of stablecoins, and cryptos more generally. Such events could become systemic in the future, especially given the strong growth in the amount of money circulating in these markets and the increasing linkages between crypto-assets and traditional finance.
Two years ago, in anticipation of difficulties arising from unregulated money-like assets, the international community tasked the relevant regulatory standard-setting bodies — the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) — to look at stablecoins. Regulators and central banks around the globe have now set out guidance on the application of relevant standards where stablecoins are used as money, to make payments. Last year, the CPMI and IOSCO issued a consultation document and we have issued the final guidance today.
It is important that the lessons are learnt and these standards are reflected in national legislation quickly, before stablecoins become systemic.
What do the standards say? They are detailed, as you would expect, but we would highlight two principles which illustrate the importance of this guidance. They apply to stablecoins the same standards that govern other forms of money used in systemically important settlement. This is to ensure that risks are managed so that they produce an equivalent regulatory outcome in terms of financial stability, safe and efficient payment systems as well as investor protection.
First, stablecoins intended to function as money and used in systemically important arrangements should ensure users will be able to convert their claims at par into other liquid forms of money, such as deposits at the central bank or at a commercial bank as soon as possible (at least by the end of the day). There should also be a clear and robust process for fulfilling holders’ redemption claims in both normal and stressed times. In short, where stablecoins are intended to function as money in payments, they need to guarantee timely convertibility into other forms of money we accept in our economies. This is the standard we apply to commercial banks today. This requirement will determine the nature — price stability and liquidity — of the assets backing a stablecoin and the legal, technical and operational arrangements for paying out stablecoin holders.
Second, stablecoin arrangements should have clear and direct lines of responsibility and accountability, for instance, by making clear what the responsible legal entity is (and who the people responsible for operating that entity are). In addition, human intervention to oversee the workings of the stablecoin should always be possible to ensure that, even in dynamic and changing environments, expert judgment and discretionary decision-making is available, if required, to deal with unforeseen situations.
It will be for individual jurisdictions to develop laws, regulations and rules to give effect to these principles. What is important is that, with international standards in place, regulators must have robust standards against which to judge how they are being met.
International standards are important whether these monies be used across borders or domestically. Of equal significance is the location of the providers, especially when stablecoin arrangements can provide their services across borders. Standards must be implemented in a harmonized way, which will require global cooperation between regulators, central banks and other relevant authorities. CPMI and IOSCO will continue to play a key part in these collective efforts.
Bloomberg News provided this article. For more articles like this please visit bloomberg.com.
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