G7 Working Group on Stablecoins: Investigating the Impact of Global Stablecoins
In October 2019, the G7 Working Group on Stablecoins (the “Working Group”) released its report on the impact of global stablecoins (the “Report”). The Report identifies the benefits that blockchain based stablecoins, a type of cryptoasset, could provide as a payment system and store of value. However, the Report notes that there are many risks and challenges associated with the implementation of stablecoins, especially when they are global scale stablecoins (“GSCs”). The Working Group concludes that, before a global stablecoin project should begin, the operational, legal, regulatory, oversight, and public policy risks associated with stablecoins must be addressed.
What Are Stablecoins?
As previously mentioned in our earlier post, Stablecoins are a type of cryptoasset that peg its value against the value of a perceived stable asset or pool of assets, such as fiat currencies (e.g., the Canadian Dollar), gold, or silver. The purpose of pegging this value to an asset class is to theoretically reduce the price volatility to provide a “stable” value amount.
Blockchain’s Potential In The Payment Space
While existing technological innovation in the payments ecosystem has developed to improve domestic payment processes to be more convenient, instantaneous, and accessible, the Report identifies that two main challenges remain in the current payment systems, which blockchain technology could help solve. First, globally, there is a lack of access to financial services. About 1.7 billion people do not have access to a transaction account, which impedes financial inclusion. Second, cross-border retail payments remain slow, expensive, and opaque.
Although it was thought that the first wave of cryptoassets would address some of the above challenges, they have been unable to do so as a result of a number of limitations, most notably, their highly volatile prices. Stablecoins may provide the answers to these challenges because of their potential ability to stabilize their value/prices by linking their value to an asset or pool of assets. Therefore, stablecoins may provide a reliable payment system and store of value, which could foster the creation of global payment arrangements that are faster, cheaper, and more inclusive.
However, these benefits can only be realized if the risks and challenges associated with the use of stablecoins are addressed. The Report identifies two types of risks and challenges. First, there are legal, regulatory, oversight, and public policy risks and challenges that occur regardless of the size of the stablecoins. Second, there are risks and challenges that may emerge if stablecoins reach a global scale.
Legal, Regulatory, Oversight, and Public Policy Risks and Challenges
Regardless of the size of the stablecoin project, the Report identified the following risks and challenges that will need to be addressed:
- legal certainty: any stablecoin project will need a well-founded, clear and transparent legal basis in all relevant jurisdictions;
- sound governance: any stablecoin project must establish sound governance practices prior to live operations, including the investment rules of the stability mechanism;
- money laundering, terrorist financing, and other forms of illicit finance: any stablecoin project will need to apply the highest international standards relating to virtual assets and their providers;
- safety, efficiency, and integrity of payment systems: any stablecoin project will need to be effectively regulated with the right oversight and ensure that the relevant framework remains technology-neutral and does not hinder innovation efforts;
- cyber security and operational resilience: any stablecoin project will need to be effectively regulated with appropriate operational and cyber risk mitigation policies;
- market integrity: any stablecoin must ensure fair and transparent pricing in both primary and secondary markets;
- data privacy, protection, and portability: any stablecoin project will need to apply the appropriate data privacy and protection rules, which should include how data will be used by participants in the ecosystem and how data is shared between the participants and/or with third parties;
- consumer and investor protection: any stablecoin project will need to ensure that consumers and investors are informed of all material risks as well as their individual obligations, including any relevant capital market laws and frameworks; and
- tax law compliance: any stablecoin project will be expected to comply with applicable tax laws and mitigate potential avoidance of tax obligations.
Global Scale Risks and Challenges
If stablecoins reach a global scale, the Report states GSCs could pose risks and challenges to:
- monetary policy transmission: any GSC project will need to assess the impact of the stablecoin’s ability to displace or substitute value of native fiat currencies in each jurisdiction, a GSC could have a broad impact on interest rates and credit institutions;
- financial stability: any GSC project will need to assess how GSCs will operate as a whole (as part of a system or when interacting with other GSC or fiat systems) and on an individual level (e.g., how the stablecoin is pegged, what assets its tied to, etc.) to ensure financial market inefficiencies are not further amplified;
- the international monetary system: any GSC project should consider the effect that a GSC cross-border payment system will have on the ability of domestic authorities to control their native currency; and
- fair competition: any GSC project should ensure that support for competition and interoperability with other payment systems.
Legal, Regulatory, and Oversight Frameworks Applicable to GSCs
Not only do GSCs present additional risks and challenges, but they will require cross-border and cross-agency collaboration. Public authorities will need to coordinate across agencies, sectors, and jurisdictions in an effort to support GSC innovation while mitigating the highlighted risks.
A number of international standard-setting bodies already have in place guidance, principles, and standards for the supervision and regulation of payment systems, including cryptoassets, which may address many of the risks and challenges listed above. These bodies include the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, and the Financial Action Task Force.
These bodies have begun assessing the adequacy of their current standards and principles, and are beginning to develop new policy recommendations specific to stablecoin arrangements. In an attempt to do this in a globally coordinated and consistent manner, the Financial Stability Board (the “FSB”), in cooperation with the standard-setting bodies, plans to assess and provide a consultative report on the key regulatory issues that exist around GSCs to the G20 Finance Ministers and central bank Governors in April 2020, with a final report being released in July 2020.
Moving Forward: Improving Cross-Border Payments
To complement the work already being undertaken by the FSB and standard-setting bodies, the Working Group recommends that public sector authorities should engage with these groups by defining their regulatory expectations with GSC arrangements.
To facilitate such engagement, the Working Group has, in its Report: (i) developed concepts for how stablecoin arrangements may be defined; (ii) detailed the regulatory, oversight, and policy issues associated with stablecoin initiatives, including how this issues may be amplified or new issues may arise if stablecoins reach a global scale; and (iii) reviewed existing regimes that may be applicable to stablecoins and noted groups that are currently assessing whether there may be regulatory gaps around GSCs.
Finally, the Working Group recommends that all relevant public stakeholders, in collaboration with international organizations, should develop roadmaps in an effort to improve the inclusiveness and efficiency of payment systems and financial services. In particular, they state that these roadmaps could include recommendations to: (i) support initiatives to improve cross-border payments; (ii) promote financial inclusion; and (iii) improve coordination between domestic and international authorities. The Working Group emphasizes that to be able to reap the benefits of technological advances, including stablecoins, more quickly and efficiently, close international cooperation is a necessity.
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