The Global Financial Markets Association’s (GFMA) comments on challenges raised by “Global Stablecoin” Arrangements

12 August 2020, Banking & Finance, Newsletter by Simon Deane, Bonnie Wong

The GFMA recently provided its response to the Financial Stability Board’s (“FSB”) consultation paper (“the Paper”) titled Addressing The Regulatory, Supervisory And Oversight Challenges Raised By “Global Stablecoin” Arrangements. The GFMA put forward certain recommendations to support the implementation of global stablecoin (“GSC”) arrangements provided for in the Paper. These recommendations include:

  • FSB should utilise a crypto-asset taxonomy that clearly establishes “stablecoin” as a subcategory of “value stable crypto-assets” to facilitate appropriate regulatory treatment.
  • Principle of  ‘same activity, same risk, same regulation’ should be applied to the regulation of stablecoin for effective supervision and oversight, excluding digital money already regulated under existing rules or subject to Financial Market Infrastructure (“FMI”) regulation.
  • FSB should clarify to whom the Paper is directed (issuers, custodians etc?) and also consider other service providers which interact with stablecoin arrangements.
  • FSB should continue its global coordination with other regulators as international consistency is important, to provide clarity around jurisdictional oversight and to encourage the development of global standards and principles for interoperability.
  • Regulatory framework adopted by the FSB must be technology agnostic to remain agile and encourage innovation.
  • GFMA requested FSB to provide further details about what constitutes “global” or “systematic” importance and their associated regulatory requirements, and to distinguish between “stablecoin arrangements” and “systemically important stablecoin arrangements” focusing on the operator of the system rather than the stablecoin itself.

The GFMA felt that the existing FSB definition of a stablecoin is too broad, and suggested a new definition[1] which excludes other digital forms of money already covered by existing regulations. It also acknowledged that stablecoin are not only asset-linked or algorithm-based, but can be hybrid. Thus, the FSB should consider how hybrid stablecoins should be regulated.

The GFMA’s other comments included the following:

  • Consideration of whether regulations for GSC arrangements should also include other service providers as systemically/globally important.
  • Financial stability concerns for financial institutions in the case of operational failure of a GSC arrangement particularly where the GSC arrangement is highly complex.
  • Employ safeguards where stablecoins are linked to fiat currency and issued by an institution that is not a regulated credit institution.

As the asset management function of a stablecoin arrangement may fall outside existing regulations and create a regulatory gap, regulators should determine who should be held responsible for overall governance of the arrangement and whether this responsibility could shift based on the decentralised nature of the issuer or stability mechanisms. All in all, the GFMA endorsed the FSB’s recommendations and recommended that institutions conducting the same activities using Distributed Ledger Technology be subject to the same regulatory requirements or oversight.

Please see the full GFMA response here.

[1] “Tokens (crypto-assets) designed to minimise/eliminate price fluctuations relative or in reference to other asset(s), which are not issued by a central bank, FMI, bank, credit institution or highly-regulated depository institution. They may represent a claim on the issuing entity, if any, and/or the underlying assets.”