In response to a call by the G20 to examine regulatory issues raised by “global stablecoin” (GSC) arrangements, the Financial Stability Board (FSB) recently issued a consultation document setting out 10 high-level recommendations to address the regulatory, supervisory and oversight challenges posed by GSCs.
The FSB’s recommendations call for regulation, supervision and oversight that is proportionate to the risks. They stress the need for flexible, efficient, inclusive, and multi-sectoral cross-border cooperation, coordination and information sharing arrangements, taking into account the perspective of emerging markets and developing economies.
XReg Consulting responded to the public consultationto provide comment on the following areas:
● The nature of decentralised stablecoins and the need to further explore and identify hybrid assets which have characteristics of both stablecoins and crypto-assets, as well as more traditional assets such as securities;
● The varying degrees of decentralisation of governance and the need for supervisory oversight to shift focus from decentralised stablecoins to the entities that interact with the GSC (as with cryptoassets and Virtual Asset Service Providers, or VASPs, in line with the FATF definition and terminology);
● The potential abuses of Oracle functions and how further consideration is required to understand the risks in relation to the stabilisation mechanism in a case where the Oracle is manipulated or if it malfunctions;
● The need to proportionately apply the FSB’s recommendations to all stablecoins rather than attempting to differentiate between global and non-global.
XReg Consulting highlighted the rapid and continuing surge in decentralised stablecoins in response to the increasing popularity of Decentralised Finance (DeFi). The adoption of numerous decentralised models poses significant regulatory challenges and is an area that will require further exploration and identification efforts in the coming months.
The FSB consultation does highlight the varying degrees of governance decentralisation, stressing that authorities should ensure one or more governing bodies are subject to appropriate oversight. However, this may not be possible when a GSC is truly decentralised and relies on an automated stabilisation mechanism with little to no influence from a centralised third party. Where this is the case, XReg Consulting made the suggestion that supervisory focus should be placed on entities that interact with the GSC, acting like VASPs, rather than focusing on the GSC itself.
With regard to Oracle functions, further consideration is necessary on their use within the context of decentralised stablecoins. The systems and controls in place for the transmission of decentralised external data will be critical to avoid the corruption of data sources. Where there is a danger of malintent, tampering with the smart contract is not necessary when it is possible to exploit the Oracle.
There are significant challenges determining in what instances a stablecoin should be considered a GSC and in what instances it should be subject to the recommendations set out in the consultation (see Section 5 of the document). Given the difficulty in determining what stablecoins are GSCs and the effort required to monitor their reach, XReg Consulting would suggest applying all recommendations to all stablecoins in a risk-based and proportionate manner.
XReg Consulting’s full response to the consultation can be found here.
Contact Nathan Catania, Partner at XReg Consulting, for more information on global stablecoins:
T: +44 20 7959 2602