IOSCO Examines Regulatory Challenges Posed by "Stablecoins"
Commentary by Steven Lofchie
In a new report, IOSCO examined the regulatory issues associated with using global stablecoins, and considered the effects of applying IOSCO Principles and Standards to stablecoin usage.
Following a hypothetical case study based on the use of stablecoins for both domestic and cross-border payments, IOSCO concluded that global stablecoins may align with securities market regulatory frameworks. IOSCO also found that the applicability of its Principles and Standards to stablecoins is dependent upon each stablecoin's (i) specific design and (ii) legal and regulatory characteristics and features.
In addition, IOSCO stated that its Fintech Network established a Stablecoin Working Group to continue evaluating global stablecoin proposals submitted by securities market regulators.
Commentary
IOSCO's study is really about the proposed LIBRA coin; that is, a digital asset supported by a reserve of assets determined to be relatively safe, such as the type of assets that are typically owned by money market funds. (See other news stories re LIBRA.) IOSCO proposes that many of the same regulations that apply to money market funds would apply to a stablecoin backed by money market fund assets. However, LIBRA was a fundamentally flawed product. Among other things, as designed, LIBRA would have been subject to extensive securities regulation, not to mention burdensome tax reporting. See Commentary in Facebook Executive Responds to Regulatory Concerns over Proposed Cryptocurrency.
The regulators should distinguish between so-called "asset-backed coins" (which are the type of coins described in the IOSCO report) and true "stablecoins" (which are digital assets backed and linked to a fixed "real" asset, most significantly, a currency, and, therefore, potentially U.S. dollars.) A U.S. dollar-based stablecoin is not like a security; it is a banking product. Such a product, if widely accepted, would have a profound effect on the U.S. and global financial markets. Such a stablecoin is the product that the U.S. financial authorities should be studying and considering.
Commentary
A global stablecoin has the great potential to create benefits to companies, consumers and investors, but the future of money is not without risks that will need to be addressed by thinking somewhat differently about regulation. Burdening a product that is meant to be "money" with all of the requirements applicable to products intended to be regulated as securities investments will be a non-starter.
Related Articles
-
IOSCO concluded that "a case-by-case approach is needed to establish which IOSCO Principles and Standards, and national regulatory regimes" apply to proposed stablecoins.