CMPI, IOSCO, Publish Final Stablecoin Guidance

The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published final guidance confirming that stablecoin arrangements should observe international standards for payment, clearing and settlement systems.

The guidance highlights that the transfer function of a stablecoin arrangement is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an arrangement that performs this transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the arrangement as a whole would be expected to observe all relevant principles in the PFMI.

Stablecoin arrangements may have some novel features as compared with existing FMIs, the bodies observe, notably involving the potential use of settlement assets that are neither central bank money nor commercial bank money that carry additional financial risk. They further say the interdependencies between multiple stablecoin functions and the degree of decentralisation of operations and/or governance, along with a potentially large-scale deployment of emerging technologies such as distributed ledger technology are also factors.

Given these features, the guidance elaborates aspects related to governance; framework for the comprehensive management of risks; settlement finality; and money settlements. The guidance also provides considerations to assist authorities in determining whether a stablecoin arrangement is systemically important.

“This guidance is a major step forward in applying ‘same risk, same regulation’ to systemically important SAs that are used for payments,” the bodies state. “It is also a key contribution to the G20 cross-border payments programme and supports the work of the Financial Stability Board in this area.”

The recent market disruptions, while costly for many, were not systemic events, but they underline the speed with which confidence can be eroded and how volatile cryptoassets can be

Recent developments in the crypto market have again brought urgency for authorities to address the potential risks posed by cryptocurrencies, including stablecoins more broadly, CPMI and IOSCO point out. They add that stablecoins may have shortcomings in the aspects that are beyond the scope of the PFMI, for example, competition, consumer protection, data privacy and anti-money laundering/combating the financing of terrorism. “Further, stablecoins, interacting with cryptocurrencies and DeFi, could lead to a fragmented and fragile monetary system,” they say.

In order to address these broader challenges in a holistic manner, the bodies argue that the regulation, supervision and oversight of stablecoin arrangements alone may not be sufficient and will need to be complemented by other private or public sector efforts such as improvements in existing payment infrastructures and exploration or development of central bank digital currency.

They also stress the need for global cooperation between central banks, other relevant authorities and a wide range of stakeholders. “It will be for individual jurisdictions to develop laws, regulations and rules to give effect to these principles,” they state. “What is important is that, with international standards in place, regulators must have robust rules against which to judge how they are being met.”

Sir Jon Cunliffe, who was recently renewed as chair of the CPMI, and who is deputy governor for financial stability at the Bank of England, says, “Recent developments in the cryptoasset market have again brought urgency for authorities to address the potential risks posed by cryptoassets, including stablecoins more broadly. The recent market disruptions, while costly for many, were not systemic events, but they underline the speed with which confidence can be eroded and how volatile cryptoassets can be.

“Such events could become systemic in the future, especially given the strong growth in these markets and the increasing linkages between cryptoassets and with traditional finance,” he adds.

The CPMI and IOSCO says they will continue to examine regulatory, supervisory and oversight issues associated with stablecoin arrangements and coordinate with other standard-setting bodies.