In a report published in October 2019, the G7 and the Bank for International Settlements have investigated the global impact of stablecoins. The task force acknowledged that stablecoins, which provide price stabilisation through pegging a coin to a pool of assets, are more capable of serving as a means of payment and store of value than other cryptoassets. Thus, they could lead to developments in global payments since they are more efficient and less expensive than traditional payment services.
However, these benefits will only materialize if the significant risks posed by stablecoins are addressed. Firstly, private entities that issue stablecoins must ensure adherence to all legal and regulatory requirements in the jurisdictions in which they operate, with adequate risk management policies being in place. In fact, the G7 stated that “no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks”.
The main risks posed by stablecoins are related to:
- Lack of legal certainty;
- Money laundering;
- Terrorist financing;
- Safety and efficiency of payment systems;
- Data protection; and
- Tax compliance.
Stablecoins which are adopted globally, labelled ‘global stablecoins’ (GSCs) by the report, pose further risks. One of these risks is a potentially detrimental effect on the international monetary system, particularly with regards to currency substitution. Other risks include:
- Monetary policy;
- Financial stability;
- Fair competition and antitrust policy;
- Money laundering; and
- Terrorist financing.
The Libra Association has published a response to the G7 report, where it reiterated that stablecoins are capable of compliance with the risks identified and that “The Libra Association is committed to building a system that replicates or exceeds current standards for consumer protection, financial stability, and global cooperation to prevent money laundering and illicit finance while preserving national sovereignty over monetary policy”.
In its response, Libra sets out its plans on tackling each risk identified in the report. For example, with regards to fair competition, existing market players will still be able to compete among other service providers since the Libra network is open-source. Anti-Money Laundering, Counter-Terrorist Financing (AML/CTF) and Know Your Customer (KYC) compliance will also be adhered to through analysis and reporting of suspicious transactions. Tax compliance will also be ensured through the provision of tools to manage tax filings.
The response essentially provides reassurance that Libra is not intended to replace the U.S. dollar or any other currencies, but to facilitate payments and its functions will essentially be limited to that of a token.
FSB working group on global stablecoins
In a letter addressed to G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB) highlighted the work being undertaken in order to address the risks posed by global stablecoins. While the G20 leaders recognize the potential benefits of global stablecoins, such as facilitating cross-border payments, they also acknowledge the risks posed to financial stability. It is in this light that the G20 leaders requested the FSB’s advice. The FSB has thus formed a working group in order to identify gaps in the existing regulatory framework applicable to stablecoins, and draft policy aimed at fostering innovation while mitigating risks. The FSB will be submitting an issues note on global stablecoins at the G20 Finance Ministers and Central Bank Governors meeting.