Stablecoins are, as the name implies, cryptocurrencies whose value is designed to be pegged to that of another more stable currency. The peg is typically set to a fiat currency that is far less volatile than the currencies within the crypto world and is maintained by market makers who provide liquidity around the pegged price. The most widely traded versions include USDT (Tether), USDC, and PAX. These innovative financial instruments are a key component of the cryptocurrency markets as they provide “digital” liquidity to traders and serve as onramps or entry points to the broader asset class. At Strix Leviathan, we regularly interact with stablecoins and consider them not only an effective tool for trading but a critical component of the crypto ecosystem. While simple in concept, stablecoins vary greatly in composition, governance, and use cases. Regulators worldwide are paying attention to the entire digital asset space. Facebook’s Libra stablecoin project quickly garnered the attention of regulators in the US, forcing Facebook to suspend its launch plans and work through the regulatory environment.
In October of 2019, Randal K. Quarles (Chair of the Financial Stability Board), remarked:
“The introduction of stablecoins, however, brings a potentially new scale and scope that the financial regulatory community must carefully consider. Although there is a small risk to financial stability today, there is no doubt the potential scale of stablecoins and other crypto-assets yet to emerge may pose regulatory challenges.”
More recently, the Financial Stability Board (FSB) issued a consultative review of stablecoins or GSCs (Global Stablecoins) that included suggestions for local regulators to conduct further reviews and examinations into their associated implications and risks. This review is an extension upon an initial inquiry into the industry that the board was called to provide last summer. The FSB, a cooperative of G-20 countries, carries a mission to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. And while the stablecoin review does not hold any formal legal power, the FSB does exert real influence on the priorities of the G-20’s national financial authorities and standard-setting bodies (e.g. IMF, The Federal Reserve, and Bank of England). Within the review, the FSB acknowledges the potential value of stablecoins (e.g. efficient transfer of value and financial inclusion) yet expresses concerns that they may pose risks to the financial stability of world markets. While the current size of the global stablecoin market (~$8bn) is a mere drop in the ocean of global fiat currencies, the FSB seems concerned about the implications of “adoption at a significant scale.”
The FSB’s report culminates in ten recommendations for national financial authorities and standard setting bodies to consider when addressing the regulatory, supervisory and oversight challenges that stable coins may present. Within the recommendations, the FSB encourages regulation (commensurate with the risks), oversight, and self-governance. While the recommendations are based on sensible principles they remain “high level” and open to the interpretation of the regulators with actual enforcement powers. In an industry where regulatory ambiguity is the norm (see Regulatory Catch-22 as described in our 2019 letter), we are encouraged by the thoughtfulness and comprehensive nature of the FSB’s review. Their work seems relatively balanced while also acknowledging the risk that well-intentioned rules can suffocate innovation. Such self-awareness in a regulatory setting is a welcome change in our opinion. Too many times we have seen the crypto market suffer from a lack of regulatory clarity that results in increased compliance costs, essentially acting as a tax on doing business.
The release of this document ruffled feathers throughout the crypto universe, understandably so given the contention we have seen to date between regulators and this new asset class. The first recommendation in the FSB review states that “Authorities should have and utilise the necessary powers and tools, and adequate resources, to comprehensively regulate, supervise and oversee a [global stablecoin] arrangement.” Without taking into consideration the specific mandate that this report was given, it would be easy to overlook the further explanation that the powers should be exercised appropriately, not absolutely. The directive for the FSB in preparing this report was “to examine regulatory issues raised by GSC arrangements” and “to advise on multilateral responses” which gives context to what would otherwise appear to be sweeping recommendations for increasing regulatory oversight. The FSB devotes a large portion of the nearly 60 page document to a rather exhaustive detail of the threats and vulnerabilities of GSC arrangements, leading one to wonder if this is setting the stage for excessive oversight. However, in many instances, they provide the voice of reason the industry has been seeking by recommending authorities review current regulations and seek to “clarify or supplement” them in regards to this asset class, as well as use “cooperation and coordination” on multi-jurisdictional issues.
We expect continued demand for stablecoins as people and businesses become increasingly comfortable with digital currencies, and new methods to securely remit payments without the need for a central broker or clearing agent. We also expect our industry to continue pushing the limits of invention and convention, as well as challenging the incumbent power brokers.
The FSB’s final report is to be published in October 2020 and they are currently soliciting feedback from the public and industry. While the final recommendations and findings will not impose any restrictions on stablecoins, there is concern that regulatory bodies will use the report as justification for unreasonable oversight. Unfortunately, the industry has been subject to inconsistent and often incongruous restrictions and rulings. We plan to offer our input to the FSB and would encourage other leaders from our industry to do the same during this important consultation period and ahead of any binding rules.
In the words of Meltem Demirors: Regulators are not in the business of picking winners and losers, and sometimes it certainly feels that way in this industry in the US… At the end of the day, people, capital and ideas flock to markets where they can flourish.
– Sadie Raney
Chief Operating Officer