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The G20 asked global regulators to be alert not only to the opportunities but also to the risks associated with 'stable corners' such as Libra.
The Financial Stability Board (FSB), an international economic grouping affiliated to the G20, published on 14 April in a 67-page report 10 key recommendations to address the regulatory, supervisory and oversight challenges posed by stable wedges.
Yet, supported by the IMF?
For those who don't know, Stable coins are cryptocurrency designed to minimize price volatility of Bitcoin. Stable coins are backed by a reserve asset and they attempt to provide the instantaneous processing and security or confidentiality of payments of cryptocurrency, and the stable and non-volatile valuations of cash currencies.
The strength of stable coins lies in their attractiveness as a means of payment. Their low cost, global reach and speed are all potentially significant advantages. In addition, Stable coins could enable transparent asset payments based on a blockchain, and can be integrated into digital applications due to their open architecture, unlike proprietary bank systems.
Indeed, in 'Digital Currencies: The Rise of Digital money', an article published in September 2019 by the IMF, it was stated that stable coins could bring significant benefits to customers and society are more likely to challenge existing payment systems than traditional cryptocurrency.
'Cash and bank deposits are faced with what is known as e-money, an electronically stored monetary value that is expressed in a currency such as the euro or the dollar and is pegged to it.”
The IMF has suggested that stable corners would allow for seamless asset payments based on a blockchain, reduce costs and increase transaction speeds.
'Speculative cryptocurrency is 'by far' riskier. Bitcoin (BTC) produces average daily price fluctuations about 10 times greater than in most G7 currency pairs, and even slightly more than the Venezuelan Bolivar against the US dollar. ”
The article states that central banks play a crucial role in guiding the path and forms of digital money products through regulatory measures. If stablecoin providers held customer assets at the central bank, customers would indirectly be able to hold and trade central bank liabilities. In practice, coins would remain the responsibility of private issuers, and customers' assets would have to be protected against the bankruptcy of the stable coin supplier.
According to the IMF, one solution is to offer some new digital money providers access to central bank reserves, but under strict conditions. This is risky, however, according to the paper, but will bring many benefits. In addition, central banks in some countries could partner with digital money providers to effectively provide a Central Bank Digital Currency (CBDC), a digital version of the local currency.
Risks to financial stability?
In a report published on April 14, 2020, the Financial Stability Board (FSB) listed a series of recommendations to regulate stable corners. Namely that the Financial Stability Board is responsible for coordinating the economic rules of the G20.
The FSB has argued that Stable Corners can pose risks to financial stability and must be adequately regulated. Regulators have been boosted by the introduction of Facebook's Stable coin, which would create an independent 'stable coin' based on a basket of currencies. Although the social media giant had previously insisted that the Libra is not a stable currency, Facebook CEO Mark Zuckerberg conceded to US lawmakers that it could be considered as such at a hearing in October.
'In times of stress, households in some countries may come to view the stable coin as a safe haven against existing fiat currencies and exacerbate the destabilization of capital flows. The volatility of capital flows can have a destabilizing effect on exchange rates and on bank financing and intermediation. ”
The organization believes that most of the technologies and mechanisms used in stable rooms have not been tested to scale. It therefore believes that these assets may have hidden vulnerabilities that will only become apparent when they are ready for use by the general public.
According to the FSB, there are still gaps in the cross-border dimension of stable corners due to the disparity of regulations between different countries. The G20 FSB stated in the press release:
Stable coins' are crypto-actives designed for the payment or storage of securities by linking their own value to a single currency or basket of currencies. While this method can effectively improve the efficiency and stability of financial markets, it can also do the opposite. The G20 therefore urged regulators around the world to strengthen risk oversight. The recommendations of the Financial Stability Board (FSB) call for regulation, supervision and oversight that is proportionate to risks,' said the FSB.
The FSB report notes that existing financial rules generally apply to stable documents, as do similar statements by US regulators. Nevertheless, the Council maintains that the rules should be the same for all companies that present a financial risk, regardless of the technology used.
Some of the recommendations relate to the creation of a flexible cross-border framework so that stable coins cannot play on jurisdictional differences.
Written By Laetitia, Project Manager
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