The Financial Stability Board (FSB), an international monitoring body composed of financial authority representatives from the 20 largest economies in the world (G-20), recently released a set of crypto guidelines containing some rigid propositions. One of the most notable demands is that every stablecoin issuer must obtain a local license before carrying out operations in a particular jurisdiction. This requirement poses significant challenges for stablecoin providers, many of whom are still struggling to obtain permission in numerous national jurisdictions.
The FSB’s global regulatory framework for crypto, released on July 17, includes high-level recommendations for regulating crypto in general. These recommendations propose that crypto platforms should comply with basic rules such as segregating clients’ digital assets from their own funds and separating functions. The FSB emphasizes that effective regulations can only be achieved when authorities can collaborate fully across jurisdictions.
However, it is the high-level recommendations for the “Regulation, Supervision and Oversight of Global Stablecoin Arrangements” that bring some more distinctive suggestions. The FSB defines a “global stablecoin” as a coin that serves as a means of payment and storage and has the potential for adoption across multiple jurisdictions. The FSB asserts that any national regulator should have the power to regulate, supervise, oversee, and, if necessary, prohibit stablecoin activities being conducted and services being offered in their jurisdiction.
To exercise control over stablecoin providers, local authorities should demand a “governance framework” from them, including a “governance body” made up of identifiable and responsible legal entities or individuals. Authorities must ensure they can control fully permissionless ledgers, as they pose challenges to accountability and governance. Additionally, stablecoin providers must comply with risk management and anti-money laundering/combatting terrorist financing (AML/CFT) requirements as well as the Financial Action Task Force (FATF) “travel rule,” which aims to target the anonymity of illegal cryptocurrency transactions.
Related Post
Stablecoin providers are also required to implement data management systems that record and safeguard relevant data and information. They must also comply with applicable data privacy requirements in local jurisdictions. Another important recommendation is the protection of redemption rights for stablecoin users. Stablecoin issuers must ensure that users’ redemption is not compromised by disruptions to intermediaries or other causes. The FSB explicitly states that a stablecoin should not rely on arbitrage activities or derive its value from algorithms.
Furthermore, the FSB stipulates that reserve assets backing the value of stablecoins should not include “speculative and volatile” assets with insufficient historical evidence and data. The market value of reserve assets should always meet or exceed the amount of stablecoins in circulation. However, the FSB makes an exception to the 1:1 reserve assets rule for stablecoin issuers subject to oversight equivalent to commercial banks.
Lastly, recommendation number 10 requires GSC issuers to obtain a license in every jurisdiction in which they plan to operate. This demand raises concerns about potential disruptions in the market and whether crypto exchanges would be required to freeze the trading of certain stablecoins in jurisdictions where the coins are still awaiting necessary documentation.
Industry experts have expressed skepticism about the feasibility and effectiveness of these recommendations. Sacha Ghebali, director of strategy at The Tie, believes that such measures could lead to a less efficient system where stablecoins are exchanged on decentralized finance (DeFi) secondary markets. Eugen Kuzin, CMO at the crypto payments ecosystem CoinsPaid, sees the license requirement as a “tricky obligation” that may be difficult to fulfill. He suggests that stablecoin issuers may engage in regulatory arbitrage by selectively integrating with jurisdictions that have more favorable rules.
While the FSB is not a regulatory body, its recommendations hold significant influence and are highly valued by governments and regulators. There are concerns about the potential application of traditional finance regulations, such as those provided by Basel Bank standards, to stablecoin providers. The speed at which assets can move on-chain requires a more cautious approach. However, Kuzin believes that the FSB’s recommendations provide valuable variability to the market and may offer opportunities for new players.
In conclusion, the FSB’s crypto guidelines contain demanding requirements for stablecoin issuers, including obtaining local licenses and implementing strict governance frameworks. These recommendations aim to ensure regulatory oversight, risk management, and compliance with anti-money laundering regulations. However, industry experts question the feasibility and potential disruptions that such requirements may pose.
