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Regulation, Supervision and Oversight of "Global Stablecoin" Arrangements
Regulation, Supervision and Oversight of "Global Stablecoin" Arrangements
13 October 2020
The Financial Stability Board (FSB) coordinates at the international level the work of national
financial authorities and international standard-setting bodies in order to develop and promote
the implementation of effective regulatory, supervisory and other financial sector policies. Its
mandate is set out in the FSB Charter, which governs the policymaking and related activities of
the FSB. These activities, including any decisions reached in their context, shall not be binding
or give rise to any legal rights or obligations.
Copyright © 2020 Financial Stability Board. Please refer to the terms and conditions
Table of Contents
iii
iv
Executive summary
So-called “stablecoins” are a specific category of crypto-assets which have the potential to
enhance the efficiency of the provision of financial services, but may also generate risks to
financial stability, particularly if they are adopted at a significant scale. While such financial
stability risks are currently limited by the relatively small scale of these arrangements, this could
change in the future. Stablecoins are an attempt to address the high volatility of “traditional”
crypto-assets by tying the stablecoin’s value to one or more other assets, such as sovereign
currencies. They have the potential to bring efficiencies to payments (including cross-border
payments), and to promote financial inclusion. However, a widely adopted stablecoin with a
potential reach and use across multiple jurisdictions (so-called “global stablecoins” or GSCs)
could become systemically important in and across one or many jurisdictions, including as a
means of making payments.
The emergence of GSCs may challenge the comprehensiveness and effectiveness of existing
regulatory, supervisory and oversight approaches. The activities associated with GSCs and the
risks they may pose can span across banking, payments, and securities/investment regulatory
regimes both within jurisdictions and across borders. GSCs also can give rise to specific
vulnerabilities. For example, depending on the facts and circumstances, specific money-
laundering/terrorist financing risks may emerge; the decentralised nature of GSC arrangements
could pose governance challenges; stabilisation mechanisms and redemption arrangements
could pose market, liquidity, and credit risks; and, the infrastructure and technology used for
recording transactions, and accessing, transferring and exchanging coins could pose operational
and cyber-security risks. Ensuring appropriate regulation, supervision and oversight within
jurisdictions and internationally will therefore be important to prevent any potential gaps and
avoid regulatory arbitrage.
The G20 mandated the FSB in June 2019 to examine regulatory issues raised by GSCs and to
advise on multilateral responses as appropriate, taking into account the perspective of emerging
market and developing economies (EMDEs). In February 2020, the G20 reiterated the
importance of evaluating and appropriately addressing the risks of GSCs before they commence
operation and supported the FSB’s efforts to develop regulatory recommendations with respect
to GSCs. The FSB carried out an analysis of financial stability risks raised by GSCs and
conducted a comprehensive survey of regulatory, supervisory and oversight approaches to
stablecoins amongst FSB members and non-FSB members represented on FSB Regional
Consultative Groups (RCGs). A report with proposed recommendations to address the
regulatory, supervisory and oversight challenges raised by GSCs arrangements was issued for
public consultation in April 2020.1 The FSB also carried out a series of virtual outreach meetings
with representatives from regulated financial institutions, financial technology firms, academia
and the legal field.
1 Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements: Consultative
document
Public responses received: Public responses to consultation on Addressing the regulatory, supervisory and oversight challenges
raised by “global stablecoin” arrangements
1
This final report takes account of the feedback from the public consultation and the outreach. It
sets out ten high-level recommendations that seek to promote coordinated and effective
regulation, supervision and oversight of GSC arrangements to address the financial stability risks
posed by GSCs, both at the domestic and international level, while supporting responsible
innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.
The recommendations call for regulation, supervision and oversight that is proportionate to the
risks, and stress the value of flexible, efficient, inclusive, and multi-sectoral cross-border
cooperation, coordination, and information sharing arrangements among authorities that take
into account the evolving nature of GSC arrangements and the risks they may pose over time.
The recommendations are addressed to authorities at jurisdictional level and focus on privately-
issued GSCs predominately intended for retail use. Although the recommendations are aimed
at global stablecoins, they could be used for other stablecoins, including those that may pose
risks to financial stability only in some countries or regions, and, potentially, other crypto-assets
that could pose risks similar to some of those posed by GSCs because of comparable
international reach, scale and use.
The report is intended to primarily address risks to financial stability and therefore does not cover
important issues such as AML/CFT, data privacy, cyber security consumer and investor
protection and competition, which however could have consequences for financial stability if they
are not properly addressed. It therefore stresses the importance of addressing these issues as
part of a comprehensive effective supervisory, regulatory and oversight framework.
The recommendations complement and are intended to inform any potential updates to
international sectoral standards and principles. Authorities should rely on sectoral standards and
principles, wherever GSC arrangements perform the same economic function and pose the
same risks as existing regulated activities covered by these standards. The recommendations
acknowledge the important role of the standard-setting bodies in reviewing, and where
appropriate adjusting their standards to take into account the novel features of GSCs in order to
further promote international cooperation and reduce the risk of arbitrage or regulatory
underlaps. The report provides a guide for regulatory authorities of relevant international
standards and potential tools to address vulnerabilities arising from GSC activities.
GSC arrangements are expected to adhere to all applicable regulatory standards and address
risks to financial stability before commencing operation, and to adapt to new regulatory
requirements as necessary. Authorities agree on the need to apply supervisory and oversight
capabilities and practices under the “same business, same risk, same rules” principle. In some
jurisdictions, some GSC functions may not fit within existing regulatory and supervisory
frameworks, such that existing approaches might need clarification, adjustment, or new
regulation.
The performance of some functions of a GSC arrangement may have important impacts across
borders. It is therefore important for authorities to take a holistic approach to regulation,
supervision and oversight, and to engage in close international cooperation and information
sharing. Relevant authorities should, where necessary, clarify regulatory powers and address
potential gaps in their domestic frameworks to adequately address risks posed by GSCs. This
will help achieve common regulatory outcomes across jurisdictions and reduce opportunities for
cross-sectoral and cross-border regulatory arbitrage, and enable appropriate regulation and
supervision of GSC arrangements as a whole.
2
The establishment of effective regulatory, supervisory and oversight approaches for GSC
arrangements will support the implementation of a key building block of the roadmap to enhance
cross-border payments commissioned by the G20.2
To keep pace with the evolution of GSC arrangements and market developments, the FSB will,
in close cooperation with relevant SSBs, review its recommendations on a regular basis in order
to identify any potential gaps, and update them if needed to ensure that they remain relevant
and continue to promote effective regulation, supervision and oversight of GSC arrangements
across jurisdictions.
Table 3 shows the indicative timelines for this work, as set out in the roadmap.
2 https://www.fsb.org/2020/10/enhancing-cross-border-payments-stage-3-roadmap/
3
FSB High-Level recommendations to address the regulatory, supervisory and oversight
challenges raised by GSCs arrangements
1. Authorities should have and utilise the necessary powers and tools, and adequate resources, to
comprehensively regulate, supervise and oversee a GSC arrangement and its associated
functions and activities, and enforce relevant laws and regulations effectively.3
2. Authorities should apply comprehensive regulatory, supervisory and oversight requirements and
relevant international standards to GSC arrangements on a functional basis and proportionately
to their risks.
3. Authorities should cooperate and coordinate with each other, both domestically and
internationally, to foster efficient and effective communication and consultation in order to support
each other in fulfilling their respective mandates and to ensure comprehensive regulation,
supervision, and oversight of a GSC arrangement across borders and sectors.
4. Authorities should ensure that GSC arrangements have in place a comprehensive governance
framework with a clear allocation of accountability for the functions and activities within the GSC
arrangement.
5. Authorities should ensure that GSC arrangements have effective risk management frameworks
in place especially with regard to reserve management, operational resilience, cyber security
safeguards and AML/CFT measures, as well as ‘fit and proper’ requirements.
6. Authorities should ensure that GSC arrangements have in place robust systems for collecting,
storing and safeguarding data.
7. Authorities should ensure that GSC arrangements have appropriate recovery and resolution
plans.
8. Authorities should ensure that GSC arrangements provide users and relevant stakeholders with
comprehensive and transparent information necessary to understand the functioning of the GSC
arrangement, including with respect to its stabilisation mechanism.
9. Authorities should ensure that GSC arrangements provide legal clarity to users on the nature
and enforceability of any redemption rights and the process for redemption, where applicable.
10. Authorities should ensure that GSC arrangements meet all applicable regulatory, supervisory
and oversight requirements of a particular jurisdiction before commencing any operations in
that jurisdiction, and adapt to new regulatory requirements as necessary.
3 This report recognises that establishing powers and tools for authorities is the province of individual jurisdictions’ governing
legislatures and any change would require legislative support.
4
Glossary4
Algorithm-based stablecoins
A stablecoin that purports to maintain a stable value via protocols that provide for the increase
or decrease of the supply of the stablecoins in response to changes in demand.
Asset-linked stablecoin
A stablecoin that purports to maintain a stable value by referencing physical or financial assets
or other crypto-assets.
Crypto-asset
A type of private digital asset that depends primarily on cryptography and distributed ledger or
similar technology.
Digital asset
A digital representation of value which can be used for payment or investment purposes. This
does not include digital representations of fiat currencies.
A stablecoin with a potential reach and adoption across multiple jurisdictions and the potential
to achieve substantial volume.
Stablecoin
A crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or
basket of assets.
Stablecoin arrangement
An arrangement that combines a range of functions (and the related specific activities) to provide
an instrument that purports to be used a means of payment and/or store of value. When
discussing a stablecoin arrangement, reference is made to:
■ Activity
Typical activities in a stablecoin arrangement are: (i) establishing rules governing the
stablecoin arrangement; (ii) issuing, creating and destroying stablecoins; (iii) managing
reserve assets; (iv) providing custody/trust services for reserve assets; (v) operating the
infrastructure; (vi) validating transactions; (vii) storing the private keys providing access
to stablecoins (e.g., using a wallet); and (viii) exchanging, trading, reselling, and market
making of stablecoins.
■ Function
4 The glossary is for the purposes of this document and does not replace other existing taxonomies.
5
Functions in a stablecoin arrangement are: (i) governing the arrangement; (ii) issuance,
redemption and stabilisation of the value of coins; (iii) transfer of coins; and (iv)
interaction with users for storing and exchanging coins.
■ Governance body
A body responsible for establishing and monitoring the rules governing the stablecoin
arrangement which would cover, among other issues, the types of entities that could be
involved in the arrangement, the protocol for validating transactions, and the manner in
which the value of the stablecoin is “stabilised”.
■ Provider of function/activity
An entity that provides a particular function or activity associated with that function in a
stablecoin arrangement.
■ User
■ Validator node
■ Wallet
An application or device for storing the private keys providing access to stablecoins.
Hosted wallets are typically held by a third party provider, unhosted wallets by the user.
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Introduction
So-called “stablecoins” are a type of crypto-asset or, more broadly, digital asset.5 Stablecoins
may be used for different purposes. Some stablecoin projects have the stated ambition to
facilitate payments, especially cross-border retail payments, which have remained relatively slow
and expensive. A stablecoin, particularly if linked to a fiat currency or a basket of currencies,
may become a widely used store of value. The use of stablecoins can evolve over time,
particularly so that a stablecoin initially intended to be used as means of payment could also be
increasingly used as a store of value.
While so-called “global stablecoins”6 have the potential to contribute to developing new global
payment arrangements, they could present a host of challenges to the regulatory, supervisory,
oversight and enforcement authorities. This is because such instruments may have the potential
to pose systemic risks to the financial system and significant risks to the real economy, including
through the substitution of domestic currencies. Risks may relate to (i) challenges for financial
stability; (ii) consumer and investor protection; (iii) data privacy and protection; (iv) financial
integrity, including compliance with rules governing anti-money laundering and countering the
financing of terrorism and proliferation (AML/CFT); (v) tax evasion; (vi) fair competition and anti-
trust policy; (vii) market integrity; (viii) sound and efficient governance; (ix) cyber security and
other operational risks; (x) the safety, efficiency and integrity of financial market infrastructures
(FMIs) (e.g. payment systems); and (xi) resolution and recovery considerations.7
Against this backdrop, the G20 mandated the FSB in June 2019 to examine regulatory issues
raised by “global stablecoin” arrangements (GSCs) and to advise on multilateral responses as
appropriate, taking into account the perspective of EMDEs. In February 2020, the G20 reiterated
the importance of evaluating and appropriately addressing the risks of GSC arrangements
before they commence operation and supported the FSB’s efforts to develop regulatory
recommendations with respect to these arrangements. In April 2020, the FSB issued a report
with a proposed set of high-level recommendations for public consultation.8 The report drew on
analysis undertaken within the FSB of potential financial stability risks and on a comprehensive
survey of regulatory, supervisory and oversight approaches to stablecoins amongst FSB
members and non-FSB members represented on FSB Regional Consultative Groups (RCGs).
In the following months, the FSB also carried out a series of virtual outreach meetings with
representatives from regulated financial institutions, financial technology firms, legal experts and
5 This document refers to stablecoins as a category of crypto-assets rather than using the broader reference to digital assets. The
reference to crypto-assets was chosen for consistency with the FSB’s prior publications.
6 Please refer to Annex 5 for elements that could be used to determine whether a stablecoin qualifies as a ”global” stablecoin.
7 For a high-level overview of the risks posed by stablecoins, see the October 2019 G7 Report, Investigating the impact of global
stablecoins.
8 FSB (2020), Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements:
Consultative document, April
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academia. This final report takes into account feedback from the public consultation and the
outreach.
1. describes GSCs and how they may differ from other crypto-assets and other stablecoins
(Section 1);
4. considers the specific challenges arising in a cross-border context, including the value for
cross-border cooperation and coordination (Section 4); and
5. sets out high-level recommendations for regulatory supervisory and oversight responses
to GSCs, including beneficial multilateral actions (Section 5).
The focus of this report is on regulatory, supervisory and oversight issues relating to privately-
issued GSCs primarily used for retail purposes, as defined in Section 1, but it may be relevant
for other types of stablecoin, including stablecoins used for wholesale market purposes and
those that may pose risks to financial stability only in some countries or regions. This report may
also be relevant for other crypto-assets that could pose risks similar to some of those posed by
GSCs because of comparable international reach, scale and use.
In line with the mandate of the FSB, the report does not address the consumer and investor
protection, cyber security, data privacy, competition, market integrity taxation as well as Anti-
Money Laundering/Combating the Financing of Terrorism (AML/CFT) issues related to GSCs.
However, a comprehensive supervisory and regulatory framework for GSC arrangements needs
to effectively address AML/CFT, data privacy, consumer and investor protection, competition
and market integrity in addition to financial stability risks. The wider monetary policy, monetary
sovereignty and currency substitution questions, the issue of public versus private provision of
digital money and payment services and issues related to central bank digital currencies are also
outside the scope of the report. The G20 asked the IMF to consider the macroeconomic
implications including monetary sovereignty issues in IMF member countries, taking into account
country characteristics, and the Financial Action Task Force (FATF) to consider AML/CFT
issues.
The FSB has been working closely with the IMF, World Bank, FATF, the Basel Committee on
Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI),
and the International Organization of Securities Commissions (IOSCO) as well as the other
SSBs and international organisations to ensure that the work underway is coordinated and
mutually supportive. Effective regulatory, supervisory and oversight approaches for GSC
arrangements will support ongoing work to enhance cross-border payments. The FSB has, in
coordination with relevant international organisations and SSBs, developed a roadmap called
8
for by the G20 to enhance cross-border payments.9 Authorities are exploring the potential role
of new payment infrastructures and, as part of this, concur that appropriate risk management
within GSCs, and sound legal underpinnings, as a basis for the use of stablecoins in multiple
jurisdictions, constitute one important building block.
There is no universally agreed definition of stablecoin. The term stablecoin does not denote a
distinct legal or regulatory classification. Importantly, the use of the term “stablecoin” in this report
is not intended to affirm or imply that its value is necessarily stable.10 Rather, the term is used
here because it is commonly employed by market participants and authorities.
The attribute global refers to a stablecoin with a potential reach and adoption across multiple
jurisdictions and the potential to achieve substantial volume, thus posing financial stability risks,
rather than a specific legal or regulatory concept.
This section describes three characteristics that may distinguish a GSC from other crypto-assets
and other stablecoins, and the potential importance of such distinctions. The first two (the
existence of a stabilisation mechanism and a specific combination of multiple functions and
activities) distinguish stablecoins from other crypto-assets. The third, the potential reach and
adoption across multiple jurisdictions, differentiates GSCs from other stablecoins.
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reference asset(s). They can be further differentiated into currency-based, financial
instrument-based, commodity-based and crypto asset-based stablecoins. The
mechanism by which a stablecoin’s value is maintained in relation to the referenced
asset may vary and includes the use of creation and redemption structures, arbitrage,
and direct rights to receive underlying reserve assets. Depending on the structure,
stablecoin holders may or may not have a redemption right against the issuer or direct
claim on the reserve assets. Reserve assets may or may not be available to be used in
case of a redemption request and may or may not benefit from consumer and investor
protection arrangements or other guaranty schemes. Additionally, there may not be any
assets in reserve if the stablecoin merely references another asset as a peg.12
(iii) interaction with coin users for storing and exchanging coins.
Considering these functions, stablecoins could share functional similarities with payment
systems or financial services or products, such as deposit liabilities or securities (including
collective investment schemes), and therefore be subject to the same risks. However, they may
also pose new risks, depending on the design of the stablecoin arrangement.
Each of these functions involves a number of constituent activities. For instance, the issuance,
redemption and stabilisation of the value of the coins typically involves creating and destroying
coins, as well as managing the corresponding reserve assets and providing custody/trust
services for those assets. The transfer of coins typically entails the operation of a suitable
infrastructure and a mechanism for validating transactions. The interaction with users typically
occurs through devices or applications that operate as “wallets”, which store the private keys
providing access to stablecoins, as well as applications that enable the exchange of coins
against fiat currencies or other crypto-assets. Considering this range of activities performed, a
12 For example, in some cases, maintenance of the stablecoin’s value involves the use of reserve assets in addition to referencing
another asset as a peg; in some other cases, the stablecoin may merely reference another asset as a peg without reserve
assets. Generally, the value of a stablecoin could be more stable if it is pegged to a widely accepted stable reference asset and
when the underlying reserve asset is highly correlated with the referenced asset (e.g. when the reserve asset is held in cash in
the same currency as the reference asset).
13 G7 Working Group on Stablecoins, Investigating the impact of global stablecoins, October 2019.
10
stablecoin arrangement is generally understood as an arrangement comprised of different,
interrelated functions and activities that can be provided by one or several entities.
The operating model employed may differ considerably across stablecoin arrangements (see
Annex 1 for examples). The core system can be a book of records that registers ownership of
coins and changes therein. It can be built as a shared ledger that operates in a decentralised
way, for example by using distributed ledger technology (DLT) and that allows for transactions
to be processed without a trusted third party.
Depending on the design and operating model, one or more entities may perform the activities,
or design protocols or codes to perform them. Moreover, other variants and ways to perform the
activities are emerging. In particular, technological innovation, such as developments in DLT,
may enable the increased use of decentralised processes. Table 1 summarises, in a stylised
manner, how the core functions of a stablecoin arrangement relate to activities and operational
design elements.
Governance of Establishing The rules covering, among other issues, the types of entities that
the rules could be involved in the arrangement, the protocol for validating
arrangement governing the transactions, the mechanism for stabilising the value of the
stablecoin stablecoin, and the arrangements for the management and
arrangement ownership of the reserve assets. Generally, a governance body is
essential to a stablecoin arrangement and also may have a role
in promoting adherence to common rules across the stablecoin
arrangement.
Issuance, Issuing, The mechanism through which stablecoins may be issued or
redemption creating and created, and subsequently destroyed by one or more entities or
and destroying software protocols designed by these entities.
stabilisation of stablecoins
value of coins
Managing The activity of managing the assets that are “backing” the value
reserve assets of a stablecoin, where a stablecoin fully or partially maintains its
value or confidence in its value based on real or financial assets
or other crypto-assets. This may involve buying and selling
assets based on an investment policy. The activity may also be
undertaken by using software protocols that adjust the
composition of the reserve through smart contracts and
algorithmic decision-making.
Providing The activity of holding the assets that are “backing” the value of a
custody/trust stablecoin. The entity or entities issuing the stablecoin or other
services for entities may hold the reserve assets.
reserve assets
Transfer of Operating the A DLT protocol determining roles in and access to the system.
coins infrastructure Access may be permissioned (access, including the ability to hold
and transfer stablecoins, is controlled with defined access
conditions) or permissionless (anyone can access and transfer
the stablecoins peer-to-peer, directly to other wallets).
Validating Mechanism by which a transaction is authorised and validated by
transactions validator nodes.
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Interaction Storing the Cryptographic wallets storing private and public keys which are
with users private keys used to digitally sign transaction instructions performed by the
providing stablecoin arrangement. Wallets can be custodial (hosted), where
access to a third party operates the wallet and holds the private keys on
stablecoins behalf of the users, or non-custodial (unhosted), where the users
(wallet) hold the private keys directly. Multiple different parties can
develop wallets, based on a set of specifications provided by the
stablecoin arrangement.
Exchanging, The activity of purchasing/exchanging a stablecoin with fiat
trading, currencies, or a stablecoin with other stablecoins or crypto-
reselling, and assets.
market making
of stablecoins
The potential reach and adoption of stablecoins across multiple jurisdictions and the potential to
achieve substantial volume differentiates a GSC from other stablecoins. A framework to identify
a GSC arrangement could seek to measure the global systemic importance of the arrangement.
The criteria to be considered in determining whether a stablecoin is a GSC need to take into
account the extent of the stablecoin’s potential use as a means of payment or store of value in
multiple jurisdictions. The likelihood that a stablecoin becomes a GSC also depends on a range
of factors, including competition dynamics, which in turn would reflect network effects, access to
data, the openness of the GSC arrangement or its integration with other digital services or
platforms.
Annex 5 sets out elements that could be used by authorities to determine whether a stablecoin
has the potential to expand reach or be adopted across multiple jurisdictions and has the
potential to achieve substantial volume.
Individual jurisdictions on their own may not be able to monitor stablecoin adoption and
materiality of risks in a comprehensive manner. For example, a stablecoin that may not pose
systemic risk in any one jurisdiction may nonetheless pose such risk globally if it has a presence
across multiple jurisdictions and therefore has linkages to the global financial system. It is
therefore important for relevant authorities in jurisdictions, where stablecoin arrangement
functions and activities occur, to coordinate and cooperate closely when monitoring stablecoin
use across borders.
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multiple jurisdictions. In addition, the different activities within a stablecoin arrangement, in
particular those related to managing the reserve assets, may considerably increase linkages to
the existing financial system. Such developments could change the current assessment.
This section describes the channels through which GSCs may adversely affect financial stability
and discusses how the specific activities performed within a GSC arrangement, and their
interaction, may affect these channels. Linking activity-specific risks to the financial stability
outcomes provides the basis for considering which functions and activities of a GSC
arrangement may warrant particular attention by regulators, supervisors and oversight
authorities.
If a GSC were widely-used as a common store of value, even a moderate variation in its value
might cause significant fluctuations in users’ wealth. Such wealth effects may be sizeable
enough to affect spending decisions and economic activity. Wealth effects may be particularly
pronounced in EMDEs where the likelihood of GSCs becoming a mainstream store of value may
be higher than in advanced economies (AE).
If widely used for payments, any operational disruption in the GSC arrangement might have
significant impacts on economic activity and financial system functioning. If users relied upon a
stablecoin to make regular payments, significant operational disruptions could quickly affect real
economic activity, e.g. by blocking remittances and other payments. Large-scale flows of funds
into or out of the GSC could test the ability of the supporting infrastructure to handle high
transaction volumes and the financing conditions of the wider financial system.
Exposures of financial institutions might increase in scale and change in nature – particularly if
financial institutions played multiple roles within a GSC arrangement (for example as resellers,
wallet providers, managers or custodians/trustees of reserve assets). This may be a source of
market, credit and operational risks to those institutions and, eventually, may end up having
systemic implications.
The large-scale use of GSCs might magnify confidence effects. A greater sensitivity to
confidence effects could also reflect the extent of the use of a GSC as a store of value and/or
means of payment. Moreover, closer linkages to financial institutions might also expose a GSC
to adverse confidence effects, such as when a financial institution that acts as reseller/market-
maker of the GSC arrangement comes under financial distress. The reverse may also be true –
the potential failure of a GSC might expose the financial institutions involved in the GSC
arrangement to adverse confidence effects.
These channels may also interact. For example, disruption to payments may cause further
decline in confidence, which in turn could prompt further redemptions and decline in the GSC’s
value, compounding wealth effects. The significance of these channels and their impact on
financial stability depend on how widely and for what purpose a GSC is used, and whether
linkages to the financial system increase. For example, if a GSC were adopted as a widespread
means of payment, but not as a store of value, its potential implications for financial stability may
13
be narrower. If, however, a GSC also became adopted as a significant store of value by some
of its users, other channels – including those pertaining to confidence effects, interlinkages to
financial institutions and macroeconomic stability – may become more prominent.
Macrofinancial risks may arise particularly if, over time, households and businesses in some
economies (e.g. EMDEs) come to hold substantial portions of their wealth in GSCs, rather than
in local currencies. During periods of stress, households in some countries might come to regard
GSCs as a safe store of value over existing fiat currencies and exacerbate destabilising capital
flows. Volatile capital flows can have a destabilising effect on exchange rates and on domestic
bank funding and intermediation.
The first type of vulnerability relates to traditional financial risks – market, liquidity and credit risk
– in a GSC arrangement. Of key importance in this regard is the choice and management of the
GSC reserve assets, particularly the degree to which they could be liquidated at or close to
prevailing market prices. Otherwise, large-scale GSC redemptions might result in “fire sales” of
reserve assets that could reduce the “stable” value of the GSC relative to the reserve assets
absent secondary guarantees. Such loss of value could impair user confidence in the resilience
of the GSC arrangement as a payment mechanism, the financial institutions and the markets in
which such assets were invested. Large-scale redemptions of GSCs might lead to large-scale
sales of other assets and stress transmitted to wider financial markets. Also, significant changes
in the composition of the reserve assets, in the absence of large-scale redemption of GSCs,
might trigger spillover effects to the wider financial system. The ability of GSC arrangements to
sell reserve assets in large volume at (or close to) prevailing market prices would depend on the
duration, quality, liquidity and concentration of the GSC’s reserve assets. The degree of
transparency as to the nature, sufficiency and liquidity of these reserve assets might also affect
confidence in the GSC. Other design features of a GSC arrangement may add to financial
stability risks. For instance, the withdrawal of liquidity provision by resellers/market makers might
cause a sharp reduction in the liquidity of the GSC and dislocation in its price, which might in
turn undermine user confidence and prompt further redemption. Moreover, users’ loss of
confidence could be more pronounced for GSCs which are not fully backed by reserve assets.
A second type of vulnerability concerns potential fragilities in the governance, operation and
design of the GSC arrangement’s infrastructure, including its ledger and the manner of validating
14
users’ ownership and transfer of coins. This vulnerability could crystallise for example due to an
operational incident at a custodian or a compromised ledger resulting from a design defect, a
cyber incident, or a failure of validator nodes. A lack of network capacity to validate – and
subsequent delays in processing – large volumes of transactions might amplify users’ loss of
confidence, and trigger further redemption requests. In the event of a disruption in the GSC
arrangement, ambiguity about rights and protection afforded to users could amplify confidence
effects. In particular, if users do not have redemption rights or a direct claim on the underlying
assets, confidence could be undermined. The degree of vulnerability would be impacted by the
effectiveness of the GSC arrangement’s governance and controls. The clarity of the roles and
responsibilities of the GSC arrangement’s governance body – including in respect of setting and
enforcing the rules on establishing the GSC’s value and on the functioning of the infrastructure
– could affect users’ confidence.
Vulnerabilities arising from applications and components within the GSC arrangement
The third vulnerability relates to the applications and components on which users rely to store
private keys and exchange coins. Such vulnerabilities could crystallise due to an operational
incident at a wallet or exchange, for example. The scope of affected users might depend on the
market share of the associated provider, and the degree to which it, for example, serves users
in different jurisdictions.
The degree of vulnerability of a GSC to shocks also depends on the operational resilience
arrangements for wallets and exchanges, including stand-in and fall-back arrangements that
ensure continuity of service to users, and on the continued liquidity of the secondary market for
coins.
Table 2 summarises, in a stylised way, the above types of vulnerabilities, their main
determinants, and the functions and activities of a GSC arrangement that are particularly
relevant in this regard.
15
Table 2: Examples of vulnerabilities and related functions and activities in a GSC arrangement
(stylised presentation)
Type of vulnerability Main determinants Functions and activities
primarily concerned
Financial exposures in the • Choice, composition and • Governing the GSC
GSC arrangement, giving management of the GSC arrangement
rise to market, liquidity and reserve assets • Issuing, creating and
credit risks.
• Robustness of liquidity destroying GSCs
provision by GSC • Managing reserve assets
resellers/market makers
• Exchanging, trading, reselling
• Ability of actors in the GSC and market making of
arrangement to employ stablecoins
leverage
Weaknesses in the GSC • Reliability and resilience of • Governing the GSC
infrastructure, giving rise to the GSC’s ledger and arrangement
operational risk (including validation mechanism, • Operating the infrastructure
cyber risks) and risk of loss including validator nodes
of data. • Validating transactions
• Capacity of network to
validate and process large • Providing custody/trust
volumes of transactions services for reserve assets
• Reliability of •
custodians/trustees
Weaknesses in those parts • Effectiveness of • Governing the GSC
of the GSC arrangement on governance in preventing arrangement
which users rely to store, fraud • Storing of private keys
exchange and trade GSCs,
• Operational resilience providing access to GSCs
including operational or
fraud risk • Clarity and robustness of • Exchanging, trading, reselling,
claims that users have14 and market making of GSCs
• Robustness of liquidity
provision by GSC
resellers/market-makers
The resilience of a GSC arrangement depends on the proper functioning of a range of different
activities and processes. Weaknesses in the interlinkages that exist between the various
functions and activities in a GSC arrangement may add to vulnerabilities. For instance, a design
failure in the validation process used for coin transfers could undermine confidence in the
payment mechanism, but also in the performance of GSCs as a store of value and eventually of
the GSC arrangement as a whole. Additionally, some of the functions of a given GSC
arrangement may be shared with other existing GSCs or crypto-assets (e.g. the infrastructures
used to transfer coins or interact with users), resulting in vulnerabilities potentially triggering
spillover effects to or from other GSCs or crypto-assets.
16
3. Existing regulatory, supervisory and oversight approaches
and challenges
The survey findings highlight that most jurisdictions do not currently have regulatory regimes
specific to crypto-assets in general or stablecoins in particular. The findings also show that, in
most jurisdictions, existing regulatory, supervisory and oversight approaches, while not specific
to crypto-assets or stablecoins, apply in whole or part and address some of the risks associated
with stablecoins or with entities that are part of the stablecoin arrangement. The most common
approach is to identify the activity performed by a stablecoin arrangement and the participants
involved, and apply the relevant existing regulation to that activity or entity according to the
“same business, same risks, same rules” principle.
Several authorities reported that they planned to clarify how existing regimes apply to stablecoins
and their providers, and that some adaptation of their regulation may be necessary, while others
indicated that their current frameworks apply to stablecoin arrangements. Some jurisdictions
have already provided guidance on how to apply existing regulation to crypto-assets and/or
stablecoins. This guidance has typically sought to help stablecoin providers understand which
regulatory requirements apply and how to ensure compliance. Others are currently developing
new legislation or regulation to address the risks posed by crypto-assets, including stablecoins.
Some jurisdictions have chosen to issue warnings to the public, highlighting the risks of these
investments and/or that some of these activities are not licensed or regulated. In a few cases,
jurisdictions have chosen to prohibit crypto-assets (including stablecoins).
Functions and activities within GSC arrangements are often, at least partly, covered by multiple
relevant regulations in AEs, while some are not covered by any regulations in EMDEs. In
general, the functions and activities that are most frequently covered include the issuance and
redemption of stablecoins; managing reserve assets; providing custody/trust services for
stablecoin reserve assets; exchanging and trading stablecoins (including reselling to retail users)
and storing the private keys providing access to stablecoins (wallets). The survey indicates that
jurisdictions were less likely to regulate the governance of the stablecoin arrangement, the
operation of the infrastructure of a stablecoin arrangement and the validation of transactions.
The type of regulatory coverage of stablecoin activities varies. For example, in many jurisdictions
AML/CFT regulations seem to apply to stablecoin activities generally. In a few jurisdictions, other
types of financial regulation, such as market integrity, investor and consumer protection
regulations, also apply to stablecoin activities like issuance, exchanging and trading of
stablecoins. See the table in Annex 2 on potential vulnerabilities arising from stablecoin activities
17
and the regulatory authorities, relevant international standards and potential tools to address
such vulnerabilities.
There is currently no common and consistent regulatory classification of the nature, functionality,
structure and rights associated with stablecoins across jurisdictions. In different jurisdictions, a
stablecoin could fall within one or multiple regulatory classifications, depending on the design of
the stablecoin and how it is offered and sold. In AE jurisdictions, stablecoins were most
frequently classified as e-money and a collective investment scheme (CIS), followed by deposits,
a security other than CIS and derivatives. For EMDEs, the most common classifications were e-
money and payment instrument.
The FSB stocktake did not reveal regulatory or supervisory gaps that are common to all
jurisdictions. Several authorities noted that their existing frameworks provide an adequate
coverage of stablecoin arrangements and that they did not identify any gaps in their regulatory,
supervisory and oversight regimes. Some authorities identified potential gaps in existing regimes
that they indicated should be addressed. One source of gaps may be an unanticipated bundling
of attributes that existing regulations, in particular those designed to be applied by sector, may
not fully capture. For instance, legal frameworks in some jurisdictions may not allow stablecoins
to fall under multiple regulatory classifications, so certain activities may not be captured at
present (e.g., if a GSC falls exclusively under securities regulation in a jurisdiction, activities
related to the transfer of coins may not be covered). Another source of gaps may be the
unbundling of activities in a stablecoin arrangement. As a consequence, some of the activities
in a GSC arrangement may fall outside of traditional regulatory boundaries.
Based on the survey findings, potential gaps in existing frameworks at domestic level may
include:
18
(ii) inability to effectively supervise and oversee a GSC arrangement if the legal
classification of a stablecoin falls outside an existing regulatory framework (e.g. e-
money or a security);
(iii) incomplete regulatory coverage of the functions and activities under a GSC
arrangement that are economically similar to those that would fall under the remit of
existing regulation, but as a result of their particular design, are not within the perimeter
of existing regulation (e.g. exchange and trading, wallet services used for storing keys,
unhosted wallets) with a range of risks not or not fully addressed (e.g. market integrity,
consumer or investor protection, cyber security, data privacy);
(iv) insufficient risk mitigation tools within a regulatory framework applicable to a given
activity (e.g. no specific capital or liquidity requirements for issuing stablecoins or
managing the reserve assets, incomplete measures addressing cyber security, and
operational risks of the underlying technology used for operating the infrastructure,
validating transactions or storing keys in wallets, absence of safeguards for users
holding unhosted wallets; lack of legal certainty regarding the consumer or investor
protection safeguards, the recovery of funds and legal remedies);
(v) lack of adequate competition policies that grant rights and safeguards to consumers
and businesses to join a GSC arrangement (e.g., by requiring interoperability protocols),
and facilitate appropriate competition among market participants.
Banks could be subject to a range of direct and indirect exposure channels in a GSC
arrangement, including as an issuer, investor, lender, custodian/wallet provider and market
maker of stablecoins. Such exposures would in principle be subject to prudential capital and
liquidity requirements.
However, the current Basel framework does not specify the prudential treatment for banks’
exposures to crypto-assets at large or crypto-assets that make use of stabilisation tools. The
BCBS is considering the appropriateness of a global prudential standard and other approaches.
The BCBS issued a discussion paper that outlines a set of general principles and considerations
to guide the design of a prudential treatment of banks’ exposures to crypto-assets, including an
illustrative example of potential capital and liquidity requirements for exposures to high-risk
19
crypto-assets.15 Building on the feedback to the discussion paper, the BCBS is currently taking
a broad and holistic approach to proceed with work on the prudential treatment of crypto-assets,
and will consult on any specific measures.
Banks having a role in a GSC arrangement could be subject to cyber, fraud, and other
operational risks as well as legal, third-party and implementation risks. The BCBS Principles for
the Sound Management of Operational Risk should help address those risks by calling a strong
control environment, appropriate internal controls and business resilience and continuity plans.16
Moreover, as noted in the March 2019 BCBS statement on crypto-assets, one of the first steps
in analysing the impact of crypto-assets on banking institutions is to assess the permissibility of
a banking institution to engage in such activity.17
The FATF, as the global standard setter for AML/CFT, set out in June 2019 how the FATF
standards should apply to virtual asset activities and Virtual Asset Service Providers
(VASPs).18,19 It set out recommendations that require countries to assess and mitigate the money
laundering and terrorist financing risks associated with virtual asset activities and VASPs; license
or register such providers; subject them to supervision or monitoring; and require that they
implement all of the AML/CFT preventive measures under the FATF recommendations just like
other financial institutions, including customer due diligence, record-keeping, suspicious
transaction reporting, and screening all transactions for compliance with sanctions.
In October 2019, the FATF clarified that both global “stablecoins” and their service providers
would be subject to the FATF standards either as virtual assets and VASPs or as traditional
financial assets and their service providers, and that stablecoins should “never be outside of the
scope of anti-money laundering controls”.20 Accordingly, the FATF has made clear that countries
should effectively implement the FATF standards as part of their domestic regulatory and
supervisory regimes for virtual assets, including stablecoins and VASPs.
In July 2020, the FATF further expanded on these findings in its report to the G20 on so-called
stablecoins.21 The FATF has found that so-called stablecoins share many of the same potential
money-laundering/terrorist-financing (ML/TF) risks as some virtual assets, in virtue of their
potential for anonymity, global reach and layering of illicit funds. Depending on how they are
designed, they may allow anonymous peer-to-peer transactions via unhosted wallets. These
features present ML/TF vulnerabilities, which are heightened if there is mass-adoption. When
20
reviewing current and potential projects, so-called stablecoins appear better placed to achieve
mass-adoption than many virtual assets, if they do in fact remain stable in value, are easier to
use and are under sponsorship of large firms that seek to integrate them into mass
telecommunication platforms.
In line with its previous statements, the FATF found that the revised FATF Standards clearly
apply to so-called stablecoins. Under the revised FATF Standards, a so-called stablecoin will
either be considered to be a virtual asset or a traditional financial asset depending on its exact
nature. A range of the entities involved in any so-called stablecoin arrangement will have
AML/CFT obligations under the revised FATF Standards. Which entities will have AML/CFT
obligations will depend on the design of the so-called stablecoin, particularly the extent to which
the functions of the so-called stablecoin are centralised or decentralised, and what activities the
entity undertakes.
The CPMI and IOSCO have carried out a preliminary analysis on the application of the Principles
for Financial Market Infrastructures (PFMI) stablecoin arrangements and their activities. The
PFMI include 24 high-level principles applicable to systemically important FMIs. Principles
include the existence of a well-founded legal basis, clear governance promoting safe and
efficiency and supporting stability of the broader financial system, risks management, and
operational resilience. Responsibility E of the PFMI provides the framework for cooperation
among central banks, market regulators, and other authorities for promoting the safety and
efficiency of systemically important FMIs.
In this preliminary analysis, the CPMI-IOSCO established that the PFMI apply to systemically
important stablecoin arrangements that perform systemically important payment system
functions22 or other financial market infrastructure (FMI) functions that are systemically
important. Further to their preliminary analysis, CPMI-IOSCO intend to determine which factors
authorities may consider for assessing whether a stablecoin arrangement is systemically
important. To the extent that systemically important stablecoin arrangements perform additional
functions not covered by the PFMI, they will be subject to relevant standards for those functions
in addition to the PFMI.
In their preliminary analysis, the CPMI-IOSCO considered that, while it may be challenging for
systemically important stablecoin arrangements, in particular for those that are partly or highly
decentralised, to comply with the standards of the PFMI, systemically important stablecoin
arrangements need to adapt to comply with them. In this regard, CPMI-IOSCO intend to further
identify the main issues for systemically important stablecoin arrangements to comply with the
PFMI. The CPMI and IOSCO are considering the need for some clarification or interpretation to
help explain how systemically important stablecoin arrangements may comply with the PFMI,
but such clarification or interpretation would not change the underlying principles that apply to
22 The PFMI note that a payment system is “…a set of instruments, procedures, and rules for the transfer of funds between or
among participants; the system includes the participants and the entity operating the arrangement.” The instruments could
potentially be the tokens issued by a stablecoin issuer, the procedures could be the payments made between token holders (or
to participating retailers), and the rules would likely be set out by the stablecoin issuer (and codified on the blockchain).
21
systemically important stablecoin arrangements. The CPMI and IOSCO also intend to analyse
whether stablecoin arrangements present additional risks not appropriately addressed by the
PFMIs. The CPMI and IOSCO are carrying out further work building on the preliminary analysis
before a definitive statement on applicability of each of the individual PFMI principles to
stablecoin arrangements can be made.
IOSCO is reviewing the applicability of IOSCO standards and principles to GSC initiatives and
published a report on 23 March 2020.23 The report assesses the implications that global
stablecoin proposals could have for securities market regulators. It concludes that GSCs may,
depending on their structure, present features that are typical of regulated securities or other
regulated financial instruments or services. It then engages in a lifecycle analysis of a
hypothetical stablecoin used for domestic and cross-border payments. The hypothetical
stablecoin uses a reserve fund and intermediaries to try to achieve a stable price vis-a-vis a
basket of low volatility currencies.
The report concludes that several principles and standards could apply to the hypothetical
stablecoin offering. These include (i) IOSCO’s Policy Recommendations for Money Market
Funds (2012); (ii) Issues, Risks and Regulatory Considerations for Crypto-asset Trading
Platforms (2020); (iii) the Principles for the Regulation of Exchange Traded Funds (2013); and
(iv) the IOSCO work on market fragmentation including the Cross Border Regulation Task Force
Report (2015) and the work of the Follow-Up Group on Cross-Border Regulation to address
potential regulatory arbitrage as well as IOSCO work on Cyber Resilience and Client Assets.
These findings may equally apply to stablecoin arrangements other than the hypothetical
stablecoin offering, subject to a facts and circumstances assessment of the individual proposal
at hand. The report also sets out considerations of broader issues of relevance to securities
market regulators and contains the CPMI-IOSCO’s preliminary analysis of the applicability of the
PFMI to GSCs. A more detailed summary of the report’s findings along with the CPMI-IOSCO
analysis are both set out in Annex 4.
Future IOSCO work will expand the functional analysis in the published report to look at other
structures of GSCs offerings and how they might interact with the perimeter of securities markets
regulation, as well as supplementing the analysis with any relevant additional information, if and
when GSC proposals come to market.
The table in Annex 2 maps the activities in a stablecoin arrangement to the associated
vulnerabilities and highlights appropriate regulatory, supervisory and oversight tools as well as
international standards that could be relevant.
22
4. Cross-border regulation, supervision and oversight
Jurisdictions generally seek to apply their rules and regulations to activities taking place in their
jurisdiction, including in situations where stablecoins are offered to local users from abroad.
However, the effective application and enforcement of a jurisdiction’s rules may be difficult as
users access services on the Internet and authorities cannot easily locate the provider of the
services. It may be further complicated by the fact that different regulatory classifications of
stablecoins and hence different regulatory, supervisory and oversight approaches are adopted
across jurisdictions. Different jurisdictional approaches could give rise to regulatory arbitrage
and fragmentation.
These cross-border challenges may be particularly significant for EMDEs. The use of stablecoins
as a means of payment and/or store of value may be more widespread in EMDEs, for example
due to the substitution of local currency, than in AEs with developed financial systems. At the
same time, the activities of a stablecoin arrangement may typically be performed by entities that
are located outside EMDE jurisdictions. Taken together, EMDEs may face a combination of
relatively high systemic relevance of a stablecoin and constraints in regulating and supervising
the arrangement.
■ Use and systemic importance – what the GSC is used for and where users are located;
■ Governance – where the decisions across the GSC arrangement are made and policies
set and enforced;
23
■ Issuance and redemption of coins, reserve management - where the issuance and
redemption of coins and the management of reserve assets occurs; the jurisdiction
whose currency or assets (e.g. government bonds) are included in reserve assets;
■ Transfer mechanisms – how transfer mechanisms are operated and how stablecoins
are exchanged, traded and resold, for example, whether or not these are centralised
processes operated by a designated entity or decentralised processes operated by
multiple entities; where data and records are located (whether transaction records and
other data are centralised or decentralised);
■ User-facing elements – where wallet and platform providers are located, whether they
operate cross-border, and whether there is vertical integration between operators of the
functions and activities of the GSC arrangement.
Challenges could arise around the ability to supervise and oversee stablecoin arrangements
holistically, rather than in a piecemeal fashion based on individual functions and activities. There
are different approaches for cross-border supervision and oversight: for prudentially regulated
financial institutions, cross-border cooperation builds on principles for comprehensive
consolidated supervision.24 The “home supervisor’, that is the supervisor in the jurisdiction where
the head office or parent entity of a financial institution is headquartered, is responsible for the
supervision of the group of related institutions on a consolidated basis. In this case, effective
consolidated supervision requires the home supervisor to cooperate with supervisors in
jurisdictions where subsidiaries or branches are located (“host supervisors”). In the case of FMIs,
a FMI’s competent authority (“lead overseer” which could be compared to the “home supervisor”)
is designated as the coordinator of the cooperation arrangement. A wide set of relevant
authorities is identified and engaged in the cooperation, taking into account the features and the
services that the FMI provides on a cross-border basis.
In both cases, the objective of the “home supervisor” and of the “lead overseer” is to gain
sufficient knowledge of the operations of the financial group or FMI, both domestic and foreign,
as a whole so as to monitor and assess risks and vulnerabilities faced by the group or FMI. Host
supervisors may have different interests in relation to the supervision of the group or FMI as a
whole, depending on whether the group or FMI has material risk exposures in the host
jurisdiction and whether it poses a systemic risk to the host jurisdiction.
A stablecoin arrangement could be different from a financial group or FMI. Unlike a financial
group, a stablecoin arrangement may be a network of unrelated entities conducting different
functions and activities usually from various jurisdictions that may only be held together by
common policies, standards and agreements about their respective roles. At the same time, a
stablecoin arrangement may involve functions that extend beyond those of a traditional financial
group or FMI. Each part, whether entity, policy, process, or technology, of a stablecoin
arrangement can affect the other parts. Depending on the specific features of the stablecoin
arrangement, there is a risk that a stablecoin arrangement is not subject to sufficiently robust
24 See for example BCBS (1992), Minimum standards for the supervision of international banking groups and their cross-border
establishments, July
24
governance and controls that are enforced through policies, standards, and contractual
obligations over its entire network of functions, activities and participants.
Whereas the objectives of comprehensive consolidated supervision are relevant in the context
of a GSC arrangement, the concepts of “home” and “host” cannot in certain cases be easily
transposed to GSC arrangements that are operated through a loose network of entities and
dispersed ownership and control structures. This is the case in particular if there is no entity
responsible for the governance of the GSC arrangement or if the back-end core functions
(governance, issuance of coins, stabilisation mechanism, or transfer mechanism) of the GSC
arrangement are performed by different entities in different jurisdictions. There may also be
different options for determining a “home jurisdiction”.25 Given these inherent limitations to the
“home-host” concept, certain cross-border supervisory and oversight models existing outside
the consolidated supervision context may be more relevant.
Existing cooperation mechanisms between sectoral authorities can help support cooperation
and coordination, possibly with some adaptations (e.g. through Memorandums of Understanding
(MoU)).
In addition to the overarching international standards referred to in Section 3.2 that could apply
to GSC arrangements, existing international standards and principles that focus on cross-border
cooperation, coordination and information sharing may also be adapted to apply to GSC
arrangements. These include principles related to cooperation, which underscore the importance
of collaboration and information-sharing, such as:
■ Responsibility E of the PFMI which provides that “central banks, market regulators, and
other relevant authorities should cooperate with each other, both domestically and
internationally, as appropriate, in promoting the safety and efficiency of FMIs.”
Responsibility E, together with its Key Considerations, provides a strong basis for
cooperation among authorities responsible for oversight at cross-border level. Where a
stablecoin arrangement may have other features and provide services in addition to
those of an FMI, Responsibility E also foresees that overseers identify and engage with
potentially broader set of authorities. CPMI-IOSCO is currently considering whether
25 For example, the FATF standards require licensing or registration of virtual asset service providers where they are incorporated
and leave individual jurisdictions to decide whether it should also be required where the service provider has management, back
office presence, or a substantial customer base.
25
additional considerations would be helpful to achieve appropriate cooperation among
relevant authorities.
■ FATF standards: The FATF standards on AML/CFT apply whether GSCs are classified
as virtual assets or as other traditional financial assets. The FATF standards on virtual
assets finalized in June 2019 require licensing or registration of virtual asset service
providers in at least the jurisdiction where they are created if a legal person or where
they are located, if a natural person. The standards also include optional further
licensing and registration in jurisdictions where service providers offer products and/or
services to customers in that jurisdiction or conduct their operations from that
jurisdiction. The FATF standards further require various forms of cross-border
cooperation among authorities, include mutual legal assistance and information
sharing.
■ The cross-border regulatory and supervisory cooperation aspects of the Joint Forum
Principles for the Supervision of Financial Conglomerates (2012).
26 See respectively, BCBS Principles for the supervision of bank’s foreign establishments (1983), Core Principles for Effective
Banking Supervision (2012), Home-host information sharing for effective Basel II implementation (2006), and Principles for
effective supervisory colleges (2014).
27 BCBS (1983) Principles for the supervision of bank’s foreign establishments, May
28 See Objectives and Principles of Securities Regulation, May 2017.
29 See https://www.iosco.org/about/?subsection=mmou.
30 See https://www.iosco.org/about/?subsection=emmou.
31 The National Bank of Belgium, as the lead overseer, conduct the oversight of SWIFT in cooperation with the other G10 central
banks, i.e. Bank of Canada, Deutsche Bundesbank, European Central Bank, Banque de France, Banca d’Italia, Bank of Japan,
De Nederlandsche Bank, Sveriges Riksbank, Swiss National Bank, Bank of England and the Federal Reserve System (USA),
represented by the Federal Reserve Bank of New York and the Board of Governors of the Federal Reserve System. The
relationship between the NBB and those other cooperating central banks has been laid downs in bilateral MoUs.
32 Similarly, a cooperative oversight arrangement is established for the oversight of CLS, which is conducted by the Federal
Reserve System, which includes both the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of
26
establishing cooperative arrangements that can help ensure comprehensive oversight and
supervision of a GSC arrangement operating across sectors and borders.
5.1. Objectives
These high-level recommendations seek to promote consistent and effective regulation,
supervision, and oversight of GSCs across jurisdictions to address the potential financial stability
risks posed by GSCs, both at the domestic and international level, while supporting responsible
innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.
The recommendations are intended to be high-level and flexible so that they can be incorporated
into the wide variety of regulatory frameworks potentially applicable to GSCs around the world.
They aim to promote a regulatory, supervisory and oversight framework that is technology
neutral and focuses on underlying activities and risks.
At the same time, the recommendations set out expectations for providers of services and
activities within the GSC arrangements and can serve as a basis for authorities’ active
engagement with stakeholders on GSC-related risks and how these are addressed.
5.2. Scope
The recommendations focus on addressing risks to financial stability and therefore do not
comprehensively cover important issues such as AML/CFT, data privacy, cyber security
consumer and investor protection, competition policy, taxation, monetary policy, monetary
sovereignty, currency substitution, and other macroeconomic concerns. However, they
acknowledge that a comprehensive supervisory and regulatory framework for GSC
arrangements should effectively address AML/CFT, data privacy, consumer and investor
protection, competition and market integrity in addition to financial stability risks.
New York, in cooperation with the G-10 and other central banks of issue of CLS-settled currencies. A protocol for cooperation
has been established (see https://www.federalreserve.gov/paymentsystems/cls_protocol.htm).
27
The recommendations apply to any GSC in any jurisdiction and help authorities to address
activities and services within GSC arrangements that may fall outside the traditional regulatory
perimeter. Consistent application of these recommendations by all relevant authorities in
jurisdictions in which GSC arrangements are active may help to ensure comprehensive
regulatory coverage and reduce the scope for regulatory arbitrage.
While focusing on GSCs that may be widely used as a means of payment and/or store of value
for consumers and businesses, the recommendations could also be relevant for:
■ stablecoin arrangements that may pose risks to financial stability only in some countries
or regions;
■ other crypto-assets that could pose risks similar to some of those posed by GSCs
because of comparable international reach, scale and use.
The high-level recommendations complement and are intended to inform any potential updates
to international sectoral standards and principles. Authorities should rely on sectoral standards
and principles for cross-border cooperation relevant to the supervision and oversight of GSC
arrangements, where they perform the same economic function as existing regulated activities
covered by these standards. These include, for example, the IOSCO Principles regarding Cross-
Border Supervisory Cooperation, the CPMI-IOSCO Principles for Financial Market
Infrastructures, including the Responsibilities of Authorities and particularly Responsibility E, the
FATF standards, in particular Recommendation 15, and the relevant principles applicable to
cross-border banking supervision and crisis management of the BCBS and the FSB. Efforts by
the standard setting bodies to review, and where appropriate adjust their standards to take into
account the novel features of stablecoins can further promote international consistency and
reduce the risk of arbitrage or regulatory underlaps.
28
Table 3: Follow-up work to the FSB report and recommendations
Completion of international standard-setting work, by reviewing existing standards and
principles, and assessing the need for further guidance in accordance with the FSB
recommendations
SSBs (CPMI, FATF, IOSCO, BCBS), as By December 2021
needed, to make any revisions to standards and
principles or provide further guidance
supplementing existing standards and principles
in light of the FSB report and following their
review of their existing frameworks, including on
cooperation, coordination and information
sharing amongst authorities.
Implementation of international standards in national jurisdictions, including effective
cooperation, coordination and information sharing arrangements to support the
comprehensive regulation, supervision and oversight of GSC arrangements across borders
and sectors, in accordance with the FSB report
National authorities to consider establishing or, By December 2021, and as needed depending
as necessary, adjusting, for any existing GSCs on the emergence of cross-border GSC
and stablecoin arrangements that have the arrangements
potential of becoming a GSC, cooperation
arrangements consistent with international
standards and principles, and the FSB report.
National authorities to consider establishing or, By July 2022, and as needed depending on the
as necessary, adjusting regulatory, supervisory emergence of cross-border GSC arrangements
and oversight frameworks consistent with the
FSB recommendations and international
standards and guidance.
Review of the implementation and assess the need to refine or adapt international standards
FSB to review in consultation with other relevant To be started in January 2022 – completed by
SSBs and international organisations the July 2023
recommendations in the FSB Report and how
any gaps identified could be addressed by
existing frameworks, and update
recommendations if needed.
Beyond 2023 and to keep pace with evolution of GSC arrangements and market developments,
the FSB will carry on reviewing its recommendations on a regular basis in order to identify any
potential gaps, and update them if needed in order to ensure that they remain relevant and
continue to promote effective regulation, supervision and oversight of GSC arrangements across
jurisdictions.
1. Authorities should have and utilise the necessary powers and tools, and adequate
resources, to comprehensively regulate, supervise, and oversee a GSC
29
arrangement and its associated functions and activities, and enforce relevant laws
and regulations effectively.33
Authorities’ powers should extend to entities that are engaged in GSC activities in their
jurisdictions and fall within the scope of their authority and mandate. Authorities should
evaluate, identify and clarify which authorities have responsibility for each activity of a
GSC arrangement, as appropriate.
Authorities should identify and address material gaps in their regulatory, supervisory and
oversight frameworks through changes in regulations, or policy, as appropriate. In some
jurisdictions, legislative changes may be necessary to address those gaps.
Authorities should ensure appropriate monitoring of GSC activities (and any significant
change to the way those activities are performed) and ensure timely access to relevant
information sufficient to conduct effective regulation, supervision and oversight.
Authorities should have the powers and capabilities to enforce applicable regulatory,
supervisory and oversight requirements, including the ability to undertake inspections or
examinations, and, when necessary, require corrective actions and take enforcement
measures. To do so, authorities should be provided with or obtain sufficient information
regarding the technology and legal obligations underpinning the GSC arrangements.
Authorities should be able to identify the legal entities responsible for the relevant
activities and to assess the ability of the GSC arrangement to implement corrective
actions.
Authorities should have the ability to mitigate risks associated with, or prohibit the use of
certain or specific stablecoins in their jurisdictions where these do not meet the applicable
regulatory, supervisory, and oversight requirements.
33 This report recognises that establishing powers and tools for authorities is the province of individual jurisdictions’ governing
legislatures and any change would require legislative support.
30
To promote a technology neutral approach that enables comprehensive oversight of
GSC’s functions and activities and mitigates regulatory arbitrage, authorities should
focus on the functions performed by the GSC arrangement and risks posed and apply
the appropriate regulatory framework in the same manner as they would apply it to
entities performing the same functions or activities, and posing the same risks (“same
business, same risk, same rules”).
Authorities should apply rules and policies, including applicable international standards,
as appropriate and to the extent that the GSC arrangement provides the same functions
and poses the same risks as other financial service providers. This includes the relevant
regulation, standards and rules for e-money issuers, remittance companies, financial
market infrastructures including payment systems, collective investment schemes, and
deposit-taking and securities trading activities. This also includes market integrity,
consumer and investor protection arrangements, appropriate safeguards, such as pre-
and post-trade transparency obligations, rules on conflicts of interest (including for
different service providers such as e.g., the reserve asset custodian and coin issuer, the
coin issuer and an exchange platform), disclosure requirements, robust systems and
controls for platforms where the GSC is traded, rules that allocate responsibility in the
event of unauthorised transactions and fraud, and rules governing the irrevocability of a
transfer orders (“settlement finality”).
There should be cooperation and coordination regarding how jurisdictions’ rules apply to
the different aspects of the GSC arrangement’s functions and activities operating across
borders, as with other types of financial arrangements.
3. Authorities should cooperate and coordinate with each other, both domestically
and internationally, to foster efficient and effective communication and
consultation in order to support each other in fulfilling their respective mandates
and to ensure comprehensive regulation, supervision, and oversight of a GSC
arrangement across borders and sectors.
31
e.g. regarding AML/CFT or cyber security. These arrangements should also consider the
potential need to seek cooperation from authorities in other jurisdictions to achieve
regulatory objectives, e.g. in implementing recovery and resolution plans, or halting
activities based in one jurisdiction having an adverse impact in another.
Where a GSC arrangement relies on a third-party, the GSC governance body should
provide a comprehensive assessment of how its reliance on the third-party does not
impede its ability to meet regulatory requirements and expectations for performance,
resilience, security, development and maintenance, and regulatory compliance.
5. Authorities should ensure that GSC arrangements have effective risk management
frameworks in place especially with regard to reserve management, operational
resilience, cyber security safeguards and AML/CFT measures, as well as “fit and
proper” requirements.
32
Authorities should ensure that GSC arrangements have in place policies that set out how
all functions and activities within the GSC arrangement are subject to risk management
measures that are appropriate to and commensurate with the specific risks that GSC
arrangements pose. If the risk from the fluctuation in the value of the underlying assets
is borne, partially or totally by the GSC operator, the relevant prudential framework (e.g.
market risk framework) should be applied to the GSC operator.
Authorities should ensure that GSC arrangements conduct proper due diligence (for
example, by applying ‘fit and proper’ standards) into individuals involved in the
management and control of the GSC arrangement, as well as those who exercise
significant power or discharge significant responsibilities in relation to GSC activities.
Authorities should ensure that GSC arrangements have in place policies that address
heightened risks for GSC arrangements, such as operational risks, money
laundering/terrorist financing risks, and cyber risks, and provide for appropriate
consumer and investor protection, in line with legal obligations in jurisdictions where a
GSC arrangement operates. Risk management measures and technical standards
should cover relevant activities performed by providers of activities in the GSC
arrangements, paying particular attention to compliance by permissionless or
anonymous networks.
Authorities should ensure that GSC arrangements conduct continuous risk assessments,
contingency preparedness, and continuity planning. Authorities should ensure that GSC
arrangements conduct a robust assessment of how their technology model and the rules
for transferring coins provide assurance of settlement finality.
Authorities should consider requiring GSC arrangements to adopt strict rules on reserve
assets management and have adequate capital and liquidity buffers to absorb credit,
liquidity and market risks, as well as risks related to legal, operational and cyber risks
relevant to the stabilisation mechanism. Provisions for capital and liquidity should ensure
that GSC arrangements that include redemption rights have taken into consideration their
ability to properly handle risks of large-scale redemption demands in cases of stressed
and extreme market conditions, including through scenario analysis for example.
There should be particular attention to the degree of risk-taking in terms of duration, credit
quality, liquidity and concentration of a GSC’s reserve assets. In addition, asset-linked
stabilisation mechanisms should have sufficient controls to ensure that GSC issuance
and destruction are sufficiently matched by a corresponding increase or decrease in
reserve assets and that such increases or decreases are managed to avoid adverse
impacts on the broader market.
6. Authorities should ensure that GSC arrangements have in place robust systems
for collecting, storing and safeguarding data.
GSC arrangements should implement and operate data management systems that
record and safeguard in a discoverable format relevant data and information collected
and produced in the course of their operations, while conforming to all applicable data
privacy requirements. Adequate controls should be in place to safeguard the integrity
33
and security of both on-chain and off-chain data and conform to applicable data
protection regulation.
Authorities should be able to obtain timely and complete access to relevant data and
information to enable them to implement adequate regulatory, supervisory, and oversight
approaches that capture the functions and activities of the GSC arrangement, in
accordance with the level and nature of the risks posed.
7. Authorities should ensure that GSC arrangements have appropriate recovery and
resolution plans.
Authorities should ensure that GSC arrangements have in place appropriate planning to
support an orderly wind-down or resolution under the applicable legal (or insolvency)
frameworks, including continuity or recovery of any critical functions and activities within
the GSC arrangement.
Authorities should consider how such plans are implemented through effective
contractual obligations among the entities in the GSC network, and address the potential
involvement of authorities in all of the jurisdictions that the entities operate in.
8. Authorities should ensure that GSC arrangements provide users and relevant
stakeholders with comprehensive and transparent information necessary to
understand the functioning of the GSC arrangement, including with respect to its
stabilisation mechanism.
Authorities should ensure that GSC arrangement makes appropriate disclosures to users
and the market regarding the design of the stabilisation mechanism (e.g. asset-linked or
algorithm-based), and the mechanism by which the stablecoin’s value is maintained.
GSC arrangements should put in place mechanisms to ensure the protection of the
interests of users and counterparties, when a potential modification of the arrangement
could have a material effect on the value, stability, or risk of the GSC.
34
9. Authorities should ensure that GSC arrangements provide legal clarity to users on
the nature and enforceability of any redemption rights and the process for
redemption, where applicable.
The GSC arrangement should provide adequate information on the recovery avenues
that are available to users that lose access to their wallet or private key for example
because of a cyber-attack or other operational incident.
Where a stablecoin is used widely for payment purposes, authorities should assess
whether safeguards or protections consistent with similar instruments are appropriate.
Where a GSC arrangement for such a stablecoin offers rights to redemption, such
redemption should be at predictable and transparent rates of exchange, including, where
authorities consider it appropriate, at par into fiat money consistent with similar
instruments used widely for payment purposes. Authorities should ensure that such GSC
arrangements follow prudential standards comparable to those required for financial
institutions performing the same economic functions and posing similar risks.
10. Authorities should ensure that GSC arrangements meet all applicable regulatory,
supervisory and oversight requirements of a particular jurisdiction before
commencing any operations in that jurisdiction, and adapt to new regulatory
requirements as necessary.
Authorities should not permit the operation of a GSC arrangement in their jurisdiction
unless the GSC arrangement meets all of their jurisdiction’s regulatory, supervisory, and
oversight requirements,34 including affirmative approval (e.g. licenses or registrations)
where such a mechanism is in place.35
GSC arrangements should have the ability to adjust their operational features, processes
and mechanisms as necessary to maintain compliance with regulatory requirements and
international standards if these evolve.
Before launching the arrangement and the provision of services to users in a particular
jurisdiction, entities and individuals involved in the management and control of the GSC
35
arrangement intending to engage in GSC functions and activities should make
themselves aware of the regulatory requirements that apply. Where regulations of more
than one jurisdiction may apply, they should make themselves aware of which
jurisdictions’ rules are applicable to different aspects of the functions and activities of the
entities performing them and should engage proactively with authorities.
36
Annex 1: Different operating models for stablecoin arrangements
Stablecoin arrangements could take on a variety of structures and operating models, including
from a technical perspective. The following four hypothetical examples can be used to illustrate
the diversity in current and proposed stablecoin arrangements.
36 The Unspent Transaction Output (UTXO)-based model records the ownership of the coins, and transfers occur through updating
the ownership records of coins. The account-based model records the amount of coins associated with each account, and
transfers occur through adjusting the amount of coins in accounts.
37
Annex 2: Examples of vulnerabilities, regulatory tools, and international standards by activity of a GSC
arrangement
Regulatory authorities and potential tools to address the vulnerabilities
Activities Vulnerabilities Authority/tool Relevant international standard
Establishing rules Fraud or conflict of interest of Ability to regulate and supervise the GSC The revised FATF Standards apply. Based on
governing the those governing the GSC arrangement in a holistic manner, e.g. through known models, developers and governance
stablecoin arrangement cooperation among authorities (akin to bodies of centralised GSCs will, in general,
arrangement Lack of contractual comprehensive consolidated supervision) have AML/CFT obligations as a financial
arrangements among the Ability to require a GSC arrangement to be institution (e.g., as a business involved in the
entities of the GSC governed in a manner that facilitates effective ‘issuing and managing means of payment’) or
arrangement regulation and supervision, including by a VASP (e.g. as a business involved in the
prohibiting fully decentralised systems ‘participation in and provision of financial
Difficulties to tackle the
services related to an issuer’s offer and/or sale
uncertainty for users due to an Governance, internal control and risk
of a virtual asset’). They can then be held
unclear definition of roles and management requirements applicable at the
accountable for the implementation of
responsibilities within the GSC level of the entire GSC arrangement
AML/CFT controls across the arrangement
arrangement Power to wind down or resolve a GSC and taking steps to mitigate ML/TF risks (e.g.
Inadequate governance arrangement in the design of the so-called stablecoin).This
framework Governance requirements requiring a solid could include, for example, limiting the scope
Lack of clear central body to legal basis of customers’ ability to transact anonymously
hold accountable Cyber security and other operational resiliency using the so-called stablecoin and/or by
safeguards ensuring that AML/CFT obligations of
AML/CFT and sanctions controls AML/CFT-obliged intermediaries within the
arrangement are fulfilled.
For GSC arrangements set up entirely by
banks, the Basel Framework and associated
principles for supervision and colleges would
provide a basis for overseeing the setup.
38
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding these
vulnerabilities would be those on legal basis,
governance and comprehensive management
of risks. Responsibility E would provide a
strong basis for cooperation among relevant
authorities. See Annex 4 on CPMI-IOSCO
preliminary analysis.
For GSC arrangements where the token or the
reserve qualifies as a security, relevant IOSCO
Principles and Standards that cover
governance arrangements would apply,
depending on the structure. These would
include relevant cooperation agreements
(IOSCO Principles37 covering Cooperation in
regulation (Principles 13 to 15), IOSCO’s
Multilateral MoU Concerning Consultation and
Cooperation and the Exchange of
Information,38 the Enhanced Multilateral MoU
Concerning Consultation and Cooperation and
the Exchange of Information,39 IOSCO’s
Principles on Cross-Border Supervisory
37 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD561.pdf
38 https://www.iosco.org/about/?subsection=mmou
39 https://www.iosco.org/about/?subsection=emmou
39
Cooperation 40 of May 2010, the cross-border
regulatory cooperation aspect of the IOSCO
2015 Cross-Border Regulation Task Force
Report 41 and the work of the Follow-Up Group
to address potential regulatory arbitrage).
Issuing, creating and Inability to meet redemptions Adequate liquidity (risk) management FATF standards apply to firms “issuing and
destroying stablecoins in stressed conditions Liquidity risk management tools (e.g. managing means of payment” or to those who
For algorithmic arrangements, redemption gates) provide “participation in and provision of
errors in the issuance or financial services related to an issuer’s offer
Certain own funds/liquidity requirements
redemption algorithm that and/or sale of a virtual asset”.
Cyber security and other operational resiliency
impact value For GSC arrangements involving banks, the
safeguards
prudential risks and operational resilience
AML/CFT and sanctions controls vulnerabilities would be subject to the Basel
Framework and Principles for the sound
management of operational risk.
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding these
vulnerabilities would be those related to
frameworks for comprehensive risk
management and settlement. See Annex 4 on
CPMI-IOSCO preliminary analysis.
Depending on the creation/redemption
processes, the IOSCO Principles for the
40
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD322.pdf
41
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD507.pdf
40
Regulation of Exchange Traded Funds
(2013)42 could be relevant.
Managing reserve A sharp fall in price and/or Portfolio diversification rules and issuer limits FATF standards apply to those who provide
assets liquidity of reserve asset(s) rules “safekeeping and administration of cash and
Change in reserve allocation Liquidity and other financial risk safeguards liquid securities on behalf of other persons”, or
across reserve assets “safekeeping and/or administration of virtual
Liquidity risk management tools
assets or instruments enabling control over
Lack of transparency in the (e.g. redemption gates)
virtual assets”.
composition of reserve Requirements on disclosure of the composition
For GSC arrangements involving banks, the
Fraud or mismanagement of of the assets
prudential risks and operational resilience
the reserve Disclosure of investment policies vulnerabilities would be subject to the Basel
Investment in illiquid assets Cyber security and other operational resiliency Framework and Principles for the sound
Significant increase in the safeguards management of operational risk.
price volatility of the reserve AML/CFT and sanctions controls Depending on its structure, the reserve may
assets that cannot be or is not engage IOSCO Liquidity Risk Management
readily managed Recommendations (2018),43 IOSCO Principles
for the Regulation of Exchange Traded Funds
or IOSCO Policy Recommendations for MMFs
(2012).44
42 IOSCO (2013), Principles for the Regulation of Exchange Traded Funds, June
43 https://www.iosco.org/news/pdf/IOSCONEWS486.pdf.
44 http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf.
41
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding these
vulnerabilities would be those on custody and
investment risks and transparency. See Annex
4 on CPMI-IOSCO preliminary analysis.
Providing Custodian failure, cross-border Segregation requirements/rights for reserve FATF standards apply to those who provide
custody/trust for resolution, fraud assets “safekeeping and administration of cash and
reserve assets Liquidity Liquidity and other financial risk safeguards liquid securities on behalf of other persons” or
“safekeeping and/or administration of virtual
Lack of legal clarity regarding Cyber security and other operational resiliency
assets or instruments enabling control over
rights to reserve assets, safeguards
virtual assets”.
particularly where legal AML/CFT and sanctions controls
regimes of different For GSC arrangements involving banks, the
jurisdictions are implicated prudential risks and operational resilience
vulnerabilities would be subject to the Basel
Framework and Principles for the sound
management of operational risk.
IOSCO Recommendations Regarding the
Protection of Client Assets (2013).45
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding these
vulnerabilities would be those on custody and
45 Recommendations Regarding the Protection of Client Assets Consultation Report and Final Report.
42
investment risks and transparency. See Annex
4 on CPMI-IOSCO preliminary analysis.
Operating the Disruption to the mechanism Liquidity and other financial risk safeguards FATF Standards apply to GSC infrastructure if
infrastructure that links the value of the Requirements on payments finality it satisfies the definition of a financial institution
stablecoin and the value of its or a virtual asset service provider provided in
Cyber security and other operational resiliency
reserves, for example a cyber the FATF glossary.
safeguards
incident For GSC arrangements involving banks, the
AML/CFT and sanctions controls
Uncertainty on the revocability prudential risks and operational resilience
of the payments vulnerabilities would be subject to the Basel
GSC ledger compromised due Framework and Principles for the sound
to design flaw, operational management of operational risk.
(e.g. cyber) incident For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding these
vulnerabilities would be those on framework
for the comprehensive management of risks
and settlement. See Annex 4 on CPMI-IOSCO
preliminary analysis.
Validating transactions GSC ledger compromised due Cyber security and other operational resiliency Depending on the functions they perform, the
to failure of multiple validator safeguards validator nodes that validate the underlying
nodes AML/CFT and sanctions controls distributed ledger technology may be VASPs
or financial institutions.
For GSC arrangements involving banks, the
prudential risks and operational resilience
vulnerabilities would be subject to the Basel
Framework and Principles for the sound
management of operational risk.
43
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, some of the
most relevant principles regarding this
vulnerability would be that on operational risk
and settlement. See Annex 4 on CPMI-IOSCO
preliminary analysis.
Storing the private Disruption of a wallet, for Liquidity and other financial risk safeguards FATF Standards apply to all businesses
keys providing access example theft of coins from Cyber security and other operational resiliency providing custodial wallet services. The FATF
to stablecoins (wallets) digital wallet or operational safeguards Standards do not place explicit obligations on
(e.g. cyber) incident. unhosted wallets.
AML/CFT and sanctions controls
Direct loss, including by For GSC arrangements involving banks, the
consumers prudential risks and operational resilience
vulnerabilities would be subject to the Basel
Framework and Principles for the sound
management of operational risk.
For GSC arrangements deemed to be perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. On the
basis of a preliminary analysis, a relevant
principle regarding these vulnerabilities would
be that on operational risk. See Annex 4 on
CPMI-IOSCO preliminary analysis.
Exchanging, trading, Withdrawal of liquidity Liquidity and other financial risk safeguards FATF Standards apply to all businesses
reselling and market provision by authorised Settlement finality requirements carrying out trading/exchanging activity. The
making of stablecoins resellers/market makers FATF Standards do not explicitly apply to
Allocation of legal responsibility for
Disruption of a trading peer-to-peer transactions without use of a
unauthorised transactions
platform. VASP or financial institution.
44
Fraud, market manipulation, Cyber security and other operational resiliency For GSC arrangements involving banks, the
unauthorised transactions safeguards prudential risks and operational resilience
Cyber incident AML/CFT and sanctions controls vulnerabilities would be subject to the Basel
Framework and Principles for the sound
management of operational risk.
For GSC arrangements deemed to perform
systemically important payment system
functions or other FMI functions that are
systemically important, the PFMI apply. See
Annex 4 on CPMI-IOSCO preliminary analysis.
Issues Risks and Regulatory Considerations
Relating to Crypto-Asset Trading Platforms
(2020)46, discussing IOSCO Principles47 13,
14, 15, 33, 34, 35, 36, 37, 29, 30, 31, 32, 38
and associated IOSCO reports.
45
Annex 3: Summary of stocktake responses
This annex presents findings from the FSB survey on regulatory and supervisory approaches to
so-called “stablecoins” (hereinafter “SCs”). All FSB members as well as the members of its
Regional Consultative Groups (RCGs) were invited to participate in the survey.
A total of 51 jurisdictions completed the survey, including 25 FSB jurisdictions and 26 RCG
jurisdictions. All questions have not necessarily been answered by jurisdictions, i.e. the sum of
responses in tables and graphs may be fluctuant and less than the total number of responses
received.
The majority of jurisdictions do not currently have SCs issued domestically. SCs are available in
31 jurisdictions, mostly cross-border. The majority of those jurisdictions, including several AE,
do not currently have regulatory or supervisory regimes that are specific to SCs per se. However,
regulatory and supervisory approaches in many of those jurisdictions do apply in whole or part
to SCs.
Graph 1 summarises responses concerning the current regulation of SCs. Most respondents
note that SCs could be classified under more than one regulatory category, and that the
classification could change as the nature and use of the SC evolves. Many respondents are of
the view that the existing regulatory and supervisory framework may not be adequate to address
the risks emanating from SCs, and that there may be a need to adjust existing regulatory
frameworks.
Regarding cross-sectoral issues, most jurisdictions are of the view that existing cooperation
mechanisms between sectoral authorities enable them to address the need for cooperation and
coordination, possibly with some adaptations (e.g. through Memoranda of Understanding
(MoU)).
46
Stablecoins-Aspects of current regulation Graph 1
0 10 20 30 40
Yes
No
Source: FSB
Regulatory classifications
Thirty-seven jurisdictions provided some information about how they might classify SCs.
Jurisdictions in AEs were more likely to have a classification scheme in place.
Graph 2 shows current and prospective classifications. SCs are most frequently classified as e-
money, a collective investment scheme (CIS) in the AEs, followed by deposits, security other
than CIS and as derivative. For EMDEs, the most common classifications used were e-money
and payment instrument.
Thirty one jurisdictions indicated that SCs could fall under multiple classifications. Jurisdictions
that classified SCs as e-money were likely to also classify them as either deposit or as a payment
system. Four out of five jurisdictions that classified a SC as a CIS (16 out of 20) also classified
it as another security, including security other than CIS, derivative, or commodity. One
jurisdiction mentioned that depending on the details, a SC could exhibit bond-like features.
A few respondents indicated that under their current legal framework, it is not possible to classify
SC as falling under multiple regulatory classifications. As such, certain activities may not be
regulated/captured depending on which regulatory classification the SC ecosystem would fall
under. Table 1 also shows that the most prominent regulation types considered by respondents
are AML/CFT, cyber/technology risk, safety/soundness, and data privacy.
47
Current and prospective classification of SCs Graph 2
Currency
Deposit
E-money
Payment instrument
Collective investment scheme (CIS)
Security other than CIS
Commodity
Derivative
Other regulated class
Unregulated
Other cryptoasset
Other virtual currency asset or digital asset
Multiple categories
0 10 20 30
AE
EMDE
Total number of responses: 40 including 22 from advanced economies (AEs), and 18 from emerging market and developing economies
(EMDEs)
Source: FSB
Regulation by activity
One respondent noted that certain activities could be easily operated remotely and shift location
quickly (e.g. mastermind, issuance of SC, reserve management) and thus would be more likely
to be prone to regulatory arbitrage than those activities that tend to have domestically-focused
functions (e.g. trading, storing, custody of SCs).
48
Table 1: Classification of SCs into activities and applicable regulations48
Governing/controlling the SC
arrangement (“mastermind”) 17 16 17 11 11 11 15 18 19 5
Issuing/redeeming SCs 33 16 16 12 17 12 18 18 21 3
48 The number in each cell indicate the number of responses received for a given activity and regulation type, e.g. 33 jurisdictions indicated that AML-CFT regulations exist and would apply to
issuing/redeeming of stablecoins.
49
Cross-border regulation and supervision of SCs
Most jurisdictions have some power with respect to SCs arrangements operating in a cross-
border context,49 whether it be SC activities provided out of a foreign jurisdiction available to a
jurisdiction’s domestic customers (Graph 3), or a SC arrangements operating domestically
offering services cross-border outside of the country (Graph 4).
With regards to data on SCs that authorities are able to collect and exchange, including across
borders, this would highly depend on the actual classification and regulation of the SC or SC
arrangement. If a given entity performing an activity of a SC arrangement is regulated, generally
broad powers are available to authorities to collect data, e.g. on payment transactions,
exposures of financial institutions to SCs, investor and trading data (depending on the licensing
regime considered). In those cases, data sharing is generally covered by existing cooperation
mechanisms in place with foreign authorities. Challenges arise where entities fall outside of the
regulatory perimeter.
49 Several so-called “stablecoins” have been mentioned as being available cross-border, with Tether being the leading one. A non-
exhaustive list also includes DAO, DAI, TrueUSD, USDPax, PAXGold, Everex, SGDR, 1SG, SDS, USDC, USDS, EURX, JPYX,
GBPX, AUDX, NZDX, CNYX, RUBX, CHFX, CADX, GLDX, SLVX.
50 More precisely, Responsibility E.
51 For example, in Europe, under the passporting rules for licensed entities, and through the supervisory and regulatory cooperation
mechanisms in place within the European Supervisory Authorities (EBA, ESMA and EIOPA).
52 Through existing or extended MoUs and similar bilateral/multilateral agreements between authorities (e.g. as offered by SSBs
such as IOSCO).
53 The existing arrangement for SWIFT has been mentioned.
50
Power that authorities have with respect to SC activities operating out of a
foreign jurisdiction available domestically (incoming) Graph 3
Some power/depends
No power
Unclear/no response
0 10 20
AE
EMDE
Source: FSB
Some power/depends
No power
Unclear/no response
0 10 20
AE
EMDE
Source: FSB
51
Extent to which a jurisdiction would rely on cross-border cooperation to
regulate or supervise SC activity Graph 5
No power
Unclear/no response
0 10 20
AE
EMDE
Source: FSB
Regarding risks that may not be adequately addressed, respondents noted that cross-border
and cross-sectoral issues would need to be considered carefully. Most jurisdictions stressed that
risks related to financial stability, monetary policy, monetary sovereignty, currency substitution,
consumer and investor protection, AML/CFT, data privacy and specific operational risks linked
to the underlying technology (DLT/Blockchain) used by SCs would need to be assessed further.
The decentralised nature of SCs systems has been underlined by some as a complexity factor.
Finally, risks of regulatory arbitrage and the risk of not capturing key activities within the
regulatory ambit have also been raised. Respondents also pointed to more general risks with
GSCs, which could become a substitute to currencies (especially for EMDEs, where also large
and volatile capital flows could become manifest through exchange rates), retail deposits or safe
assets, exacerbate bank runs, and disintermediate more traditional financial institutions. Some
respondents are confident that, if a GSC system were considered a payment system, existing
frameworks (e.g. PFMI) would apply and cover risks adequately.
Most respondents indicated that adjustments to existing regulatory frameworks may be needed
in the future. A few respondents indicated their intention to take legislative action, either to
address missing parts in their regulatory regimes (e.g. trading/exchanging, storing SCs), or to
adopt a comprehensive framework (e.g. in the EU, with a potential new legislation for a common
EU approach to crypto-assets, including SCs).
52
Stablecoins: potential evolution of regulation Graph 6
No
No
0 10 20 30
AE
EMDE
Source: FSB
Graph 7 shows that jurisdictions from both AEs and EMDEs considered the potential large
number of users, the involvement of BigTechs, the potential cross-border usage of a GSC for
payments or remittances, and the ability for a GSC to become a store of value to be the main
features of a GSC that would distinguish it from other SCs and could pose a greater risk to
financial stability and regulatory objectives pursued by authorities.
Jurisdictions in the AEs tended to be more concerned by a GSC’s perceived reliability as a store
of value and the complex and decentralised nature of a GSC’s ecosystem. On the other hand,
EMDE jurisdictions expressed greater concern about a GSC being linked to foreign currency,
whether it be the service provided or redemption value of a GSC being linked to foreign currency.
53
Annex 4: Details from standard-setting bodies on work underway
BCBS
2. the quantification of banks’ direct and indirect exposures to crypto-assets and related
services through periodic data-collection exercises; and
In March 2019, the Committee published a newsletter on the risks associated with crypto-assets.
The Committee noted that the continued growth of crypto-assets has the potential to raise
financial stability concerns and increase risks faced by banks, and that many types of crypto-
assets do not reliably provide the standard economic functions of money issued or backed by a
government or public authority and are unsafe to rely on as a medium of exchange or store of
value. The newsletter outlined a set of minimum supervisory expectations for banks that are
authorised, and decide, to acquire crypto-assets and/or provide related services.
The Committee published a discussion paper in December 2019 to seek the views of
stakeholders on a range of issues related to the prudential regulatory treatment of crypto-assets,
including:
1. the features and risk characteristics of crypto-assets that should inform the design of a
prudential treatment for banks’ crypto-asset exposures; and
The Committee is also assessing the supervisory and bank implications of GSCs, including the
role of banks acting as intermediaries, custodians, or providers of other services, and with
respect to liquidity risk, operational risk, and AML/CFT risk.
54
FATF
In July 2020, the FATF further expanded on these findings in its report to the G20 on so-called
stablecoins. The FATF has found that so-called stablecoins share many of the same potential
ML/TF risks as some virtual assets, in virtue of their potential for anonymity, global reach and
layering of illicit funds. Depending on how they are designed, they may allow anonymous peer-
to-peer transactions via unhosted wallets. These features present ML/TF vulnerabilities, which
are heightened if there is mass-adoption. When reviewing current and potential projects, so-
called stablecoins appear better placed to achieve mass-adoption than many virtual assets, if
they do in fact remain stable in value, are easier to use and are under sponsorship of large firms
that seek to integrate them into mass telecommunication platforms.
In line with its previous statements, the FATF found that the revised FATF Standards clearly
apply to so-called stablecoins. Under the revised FATF Standards, a so-called stablecoin will
either be considered to be a virtual asset or a traditional financial asset depending on its exact
nature. A range of the entities involved in any so-called stablecoin arrangement will have
AML/CFT obligations under the revised FATF Standards. Which entities will have AML/CFT
obligations will depend on the design of the so-called stablecoin, particularly the extent to which
the functions of the so-called stablecoin are centralised or decentralised, and what activities the
entity undertakes.
Importantly, central developers and governance bodies of so-called stablecoins will have
AML/CFT obligations under the revised FATF Standards, where they are carrying out the
activities of a financial institution or VASP, in addition to the AML/CFT obligations of other entities
with AML/CFT obligations, e.g. wallet providers. The central governance bodies of so-called
stablecoins are in a unique position to undertake ML/TF risk mitigation, as they determine the
functions of the so-called stablecoin, who can access the arrangement and whether AML/CFT
preventive measures are built into the arrangement. For example, they could ensure that the
access to the transfer system is only possible through AML/CFT-compliant regulated VASPs.
Not all so-called stablecoins may have a readily identified central body however.
Based on current known models, the FATF consider that so-called stablecoins with potential for
mass-adoption will be centralised to some extent, with an identifiable central developer or
governance body. The FATF considers that these developers and governance bodies will be, in
general, financial institutions (e.g., as a business involved in the ‘issuing and managing means
of payment’) or a VASP (e.g., as a business involved in the ‘participation in and provision of
financial services related to an issuer’s offer and/or sale of a virtual asset’) under the revised
FATF Standards. This is an important control to mitigate the ML/TF risks posed by such so-
called stablecoins. Furthermore, there will be a range of other entities with AML/CFT obligations
even in a centralised arrangement, including customer-facing exchanges and transfer services
and custodial wallet providers.
While decentralised so-called stablecoins without such an identifiable central body, prima facie,
may carry greater ML/TF risks due to their diffuse operation, the FATF considers that their
potential for mass-adoption is lower than centralised arrangements and, therefore, their
associated ML/TF risks are smaller (although still present). However, even in a decentralised
structure, there could also be a range of entities with AML/CFT obligations, including customer-
facing exchanges and transfer services and custodial wallet providers. Importantly, there are
functions that may mean an entity has AML/CFT obligations prior to the launch of a decentralised
55
so-called stablecoin, as the process necessary to bring a product to launch is unlikely to be able
to be fully decentralised.
The FATF considers that the preventive measures required of intermediaries under the revised
FATF Standards have worked to mitigate the ML/TF risks posed by so-called stablecoins
currently in existence. Accordingly, the FATF does not consider that the revised FATF Standards
need amendment at this point in time. Nonetheless, the FATF recognises that this is a rapidly
evolving area that must be closely monitored and that jurisdictions must be effectively
implementing the revised Standards.
In particular, it is important that ML/TF risks of so-called stablecoins, particularly those with
potential for mass-adoption and increased anonymity, are analysed in an ongoing and forward-
looking manner and are mitigated before such arrangements are launched. As so-called
stablecoins could quickly become available globally, with their functions decentralised across
multiple jurisdictions, international co-operation between jurisdictions is critical to ensure ML/TF
risks are appropriately addressed.
The FATF has also identified potential risks which may require further action, including; so-called
stablecoins located in jurisdictions with weak or non-existent AML/CFT frameworks (which would
not properly implement AML/CFT preventive measures) and so-called stablecoins with
decentralised governance structures (which may not include an intermediary that could apply
AML/CFT measures) and anonymous peer-to-peer transactions via unhosted wallets (which
would not be conducted through a regulated intermediary).
In addition to working collaboratively with the FSB and other global standard-setting bodies, the
FATF agreed to undertake four actions:
(i) The FATF calls on all jurisdictions to implement the revised FATF Standards on virtual
assets and VASPS as a matter of priority.
(ii) The FATF will review the implementation and impact of the revised Standards by June
2021 consider whether further updates are necessary. This will include monitoring the
risks posed by virtual assets, the virtual asset market, and proposals for arrangements
with potential for mass-adoption that may facilitate anonymous peer-to-peer
transactions.
(iii) The FATF will provide guidance for jurisdictions on so-called stablecoins and virtual
assets, as part of a broader update of its Guidance. This will set out in more detail how
AML/CFT controls apply to so-called stablecoins, including the tools available to
jurisdictions to address the ML/TF risks posed by anonymous peer-to-peer transactions
via unhosted wallets.
(iv) The FATF will enhance the international framework for VASP supervisors to co-operate
and share information and strengthen their capabilities, in order to develop a global
network of supervisors to oversee these activities.
56
CPMI-IOSCO Preliminary analysis of the application of the PFMI to
stablecoin arrangements
Key points
CPMI-IOSCO have undertaken a preliminary analysis of the applicability of the Principles for
Financial Market Infrastructure (PFMI)54 to stablecoin arrangements.
The PFMI are designed to apply to all systemically important Financial Market Infrastructures
(FMI). The PFMI are based on a functional approach and allow for a wide range of organisational
forms, institutional designs, and arrangements.
Stablecoin arrangements can be designed to cover a range of functions and those functions will
determine the standards that will be applied. Some stablecoin arrangements will be designed to
settle payments via a transfer mechanism, providing a core function that meets the definition of
a payments system, as defined in Annex D of the PFMI.55 However, other stablecoin
arrangements may perform a variety of different FMI functions. Some of these arrangements
may be systemically important, having the potential to trigger or transmit systemic disruption.
Where stablecoin arrangements perform systemically important payment system
functions or other FMI functions that are systemically important (hereafter “systemically
important stablecoin arrangements”), the PFMI apply to such arrangements.
To the extent that systemically important stablecoin arrangements perform additional functions
not covered by the PFMI, they will be subject to relevant standards for those functions in addition
to the PFMI. These standards may have interdependencies. For example: the PFMI (Principle
9) state that systemically important FMIs should use a settlement asset with little or no credit or
liquidity risk, and where commercial bank money is used this relies on the Basel standards for
commercial banks.56 Further work may be needed to explore and lay out clearly the
interdependencies of the PFMI with other international standards, including how each addresses
the risks associated with a systemically important stablecoin arrangement’s stabilisation
activities.
54 PFMI are available on the CPMI and IOSCO websites: www.bis.org/cpmi/publ/d101a.pdf and
www.iosco.org/library/pubdocs/pdf/IOSCOPD377-PFMI.pdf.
55 Annex D of the PFMI states: “A payment system is a set of instruments, procedures, and rules for the transfer of funds between
or among participants; the system includes the participants and the entity operating the arrangement.” (Paragraph 1.10 of the
PFMI).
56 Principle 9 (Money settlements) is applicable to systemically important payment systems, securities settlement systems and
CCPs.
57
Regulatory or supervisory principles around consumer and investor protection, data privacy,
Anti-money laundering (AML) and market integrity are also likely to be crucial elements of the
overall regulatory framework that would apply to a systemically important stablecoin
arrangement. Cross border regulatory cooperation will be important given the potential for
regulatory arbitrage.
The PFMI are technology neutral. It may be challenging for some systemically important
stablecoin arrangements to comply with the high standards of the PFMI, particularly for those
systemically important stablecoin arrangements that are partially or highly decentralised.
Nevertheless, systemically important stablecoin arrangements will need to adapt to meet them.
Some clarification or interpretation may help explain how systemically important stablecoin
arrangements may comply with the PFMI, but such clarification or interpretation would not
change the underlying principles that apply to a systemically important FMI. Such clarification or
interpretation would seek to explain how the PFMI apply to organisations providing novel but
systemically important FMI functions and to help such organisations understand what observing
the PFMI, at minimum, will require of their design choices. CPMI-IOSCO are carrying out further
work to explore the need for such clarification or interpretation.
1. Introduction
The Principles for Financial Market Infrastructures (PFMI) are designed to apply to all
systemically important Financial Market Infrastructures (FMI).57 FMIs facilitate the clearing,
settlement and recording of monetary or other financial transactions, such as payment,
securities, and derivatives contracts. They play an essential role in the global financial system
and the broader economy. If not properly managed, FMIs can be sources of financial shocks,
such as liquidity dislocations and credit losses, or a major channel through which these shocks
can be transmitted across domestic and international financial markets. Responsibility E of the
PFMI provides the framework for cooperation among central banks, market regulators, and other
authorities for promoting the safety and efficiency of systemically important FMIs.
This note describes CPMI-IOSCO’s preliminary analysis of how the PFMI58 are relevant and
applicable to systemically important stablecoin arrangements. Stablecoin arrangements can be
complex, consisting of multiple entities, possibly located in several jurisdictions and possibly
performing a mix of different FMI functions. Ultimately, how the PFMI are applied to a particular
systemically important stablecoin arrangement would depend on the arrangement’s specific
design, characteristics, and features, which would have to be addressed on a case-by-case
basis.
Preliminary analysis suggests that the PFMI provide relevant international standards for
authorities to take into account in (1) considering regulatory approaches that may be appropriate
57 The PFMI define an FMI in a broad sense as a “multilateral system among participating institutions, including the operator of the
system, used for the purposes of clearing, settling or recording payments, securities, derivatives, or other financial transactions”.
In particular, the PFMI apply to systemically important payment systems (SIPS), central counterparties (CCPs), central securities
depositories (CSDs), securities settlement systems (SSSs), and trade repositories (TRs).
58 The PFMI are made up of 24 principles that apply to one or more types of systemically important FMIs. Furthermore, five
Responsibilities apply to authorities supervising or overseeing such FMIs. In particular Responsibility E addresses cooperation
among central banks, market regulators, and other authorities. Annex F applies to critical service providers of FMIs.
58
for systemically important stablecoin arrangements, (2) promoting their safety and efficiency,
and (3) cooperating in fulfilling their respective functions. While no need for an amendment of
the PFMI is identified at this point in time, it is noted that proposed and prospective systemically
important stablecoin arrangements may encounter challenges in meeting some of the relevant
PFMI standards.
CPMI-IOSCO envisage conducting additional work to analyse how particular aspects of the
PFMI may be applied to systemically important stablecoin arrangements. If this further analysis
reveals any gaps or the need for clarifications, they would need to be addressed, but this will not
amount to a derogation or disapplication of the underlying principle. CPMI-IOSCO will coordinate
with other international bodies to share perspectives and avoid duplication of work.
The PFMI are expected to be applied to systemically important FMIs. The PFMI are based on a
functional approach60 and allow for a wide range of organisational forms, institutional designs,
and arrangements of payment processes. The key features of stablecoin arrangements may, to
a large extent, be comparable to those of payment systems, as defined in Annex D of the PFMI.61
In particular, most stablecoin arrangements appear to be inherently designed, at a minimum, to
settle payments via a transfer mechanism, where “money settlement”62 occurs, e.g. when a
“token” transfer is recorded on the arrangement’s “ledger”.63 In such an arrangement, the core
activity of stablecoin arrangements may be a payment system function.
A stablecoin arrangement is also designed to enhance confidence in the value of the issued
“tokens”. Therefore, often “tokens” purportedly are “backed” by funds, such as central bank
59 A stablecoin arrangement, or particular parts thereof, may be classified as a different type of regulated entity (i.e. not only as a
payment system) or a different type of regulated activity. Other regulatory/supervisory frameworks include IOSCO frameworks
on Money Market Funds, Protection of Client Assets, and Crypto-Asset Trading Platforms, among others.
60 The PFMI emphasise the service provided, not the design choice: “FMIs can differ significantly in organisation, function, and
design. FMIs can be legally organised in a variety of forms, […] may be owned and operated by a central bank or by the private
sector, […] may also operate as for-profit or not-for-profit entities, […] can be subject to different licensing and regulatory
schemes within and across jurisdictions. […] There can be significant variation in design among FMIs with the same function.”
Paragraph 1.9 of the PFMI.
61 “A payment system is a set of instruments, procedures, and rules for the transfer of funds between or among participants; the
system includes the participants and the entity operating the arrangement.” Paragraph 1.10 and Annex D of the PFMI.
62 Principle 9 (Money Settlements) is directly applicable to this key function, since it covers the situation when “an FMI conducts
money settlements on its own books”.
63 See Graph A.1 in Annex A of the G7 Working Group on Stablecoins, (2019), Investigating the impact of global stablecoins,
October. Graph A.1 provides a functional view of the stablecoin ecosystem along three functions: Issues and stability
mechanism, Transfer mechanism, User interface.
59
deposits, commercial bank deposits, and/or other assets such as securities.64 This is one means
by which a stablecoin arrangement may provide a stabilisation function.
Some stablecoin arrangements may also have a user interface function (interfaces may differ
across stablecoin arrangements) that provides access points for users, e.g. wallets.
More broadly, some stablecoin arrangements may also be designed to provide services ancillary
to typical payment system services (e.g. some Delivery versus Payment (DVP) or CSD/SSS
type services) and may thus be of a “hybrid” FMI nature.
Given that some stablecoin arrangements are designed to be used as means of payment, CPMI-
IOSCO believe that, for purposes of this preliminary consideration of the application of the PFMI,
the existence of functions within a stablecoin arrangement not directly linked to payments does
not weigh against using payment systems as an appropriate proxy for categorising stablecoin
arrangements.
For the purpose of assessing the application of the PFMI to stablecoin arrangements, three high-
level forms of stablecoin arrangements have been considered. These forms attempt to capture
different potential approaches to the governance of the arrangement as a whole, the design of
the “ledger” itself, and the unit of account the settlement asset represents. The three forms are:
1. Centralised stablecoin arrangements that aim to fix the price of the token to a particular
fiat currency, have a central governance for all functions of these arrangements, and use
a private and permissioned distributed ledger.
2. Partially-distributed stablecoin arrangements that have their own unit of account, the
value of which is derived from a pool or basket of assets and do not necessarily have a
fixed exchange rate to a fiat currency. There is a central governance entity for the issue,
stabilisation and transfer mechanism, and the arrangement is based on a private
permissioned distributed ledger. However, the user interface is usually provided by
independent third party entities.
3. Highly-distributed stablecoin arrangements65 that have their own unit of account, the
value of which is derived from a pool or basket of assets and does not necessarily have
a fixed exchange rate to a fiat currency. A central entity may govern the issue and
stabilisation mechanism. The transfer function is performed on a public un-permissioned
distributed ledger meaning that no responsible entity can be identified. The user interface
is provided by independent third party entities.
64 Principle 16 (Custody and investment risks) is directly applicable to this key aspect of a stablecoin arrangement, since it
addresses the need for an FMI to “safeguard its own and its participants’ assets” and to address the credit, market, and liquidity
risks associated with the custody and investment of these assets.
65 Such arrangements seem to be theoretical at this stage.
60
3. Systemic importance of stablecoin arrangements
As noted above, the PFMI are expected to be applied to systemically important FMIs, and they
provide guidance for relevant authorities to assess the systemic importance of payment
systems.66 Relevant authorities have also usually developed a set of qualitative and quantitative
factors to assess whether an FMI is systemically important in their own jurisdictions which could
inform the assessment of the systemic importance of a stablecoin arrangement for the purpose
of PFMI application. Several authorities may be relevant for the purposes of assessing the
systemic importance of a stablecoin arrangement due to the number of functions a stablecoin
arrangement may carry out and the number of jurisdictions in which it may operate. Additional
considerations could help in capturing specificities of stablecoin arrangements including
oversight implications of different levels of decentralisation.
Based on a preliminary analysis, the most relevant principles for systemically important
stablecoin arrangements would appear to be Principles 1-5, 7- 9, 11-12, 15-23, and Annex F,
given that stablecoin arrangements may perform functions that cut across a variety of FMI
classifications. Preliminary analysis suggests that all of these may be of general application to
any systemically important stablecoin arrangement. However, there are some principles which
may be more challenging for systemically important stablecoin arrangements to meet either due
to the uncertainty around what PFMI observance would look like in practice for any stablecoin
arrangement or because of certain design choices associated with partially and highly-
distributed stablecoin arrangements. The more decentralised the arrangements are, the higher
the challenges may be.
As an initial matter, for most of the principles, CPMI-IOSCO preliminarily note that observance
would be challenging for both partially distributed and highly distributed stablecoin
arrangements. Further, CPMI-IOSCO have identified several principles that likely would be
challenging to observe for all types of stablecoin arrangements. For these particular principles,
the precise application or interpretation may not always be straightforward.
66 The PFMI state that “…a payment system is systemically important if it has the potential to trigger or transmit systemic
disruptions; this includes, among other things, systems that are the sole payment system in a country or the principal system in
terms of the aggregate value of payments; systems that mainly handle time-critical, high-value payments; and systems that
settle payments used to effect settlement in other systemically important FMIs.” Paragraph 1.20 of the PFMI.
61
For example, Principle 1 states that “an FMI should have a well-founded, clear, transparent, and
enforceable legal basis for each material aspect of its activities in all relevant jurisdictions”.
Because the legal qualification of stablecoins often is uncertain, stablecoin arrangements may
face challenges in establishing the required (domestic and cross border) sound legal
underpinnings. Moreover, protections under existing legislation, including payments law,
settlement finality provisions and conflict of laws regimes in local jurisdictions, were not written
with stablecoin arrangements in mind, and in some jurisdictions may not necessarily extend to
such arrangements, leading to possible legal uncertainties in the absence of guidance. These
challenges are expected to be even greater for partially-distributed or highly-distributed
stablecoin arrangements as it may require a heterogeneous set of distributed entities (operating,
for example, the transfer mechanism or parts of the user interface) potentially being located in
multiple jurisdictions to function according to a common and unified set of rules consistent with
Principle 1.
Further, Principle 9 states that “an FMI should conduct its money settlements in central bank
money where practical and available. If central bank money is not used, an FMI should minimise
and strictly control the credit and liquidity risk arising from the use of commercial bank money.”
Stablecoin arrangements will still be expected to strictly minimise and control the credit and
liquidity risk arising from their chosen settlement asset, including when a stablecoin arrangement
provides settlement on its own books. However, the characterisation of the settlement asset in
stablecoin arrangements (e.g. as commercial bank money or not) may not always be
straightforward. Further consideration would also be useful to clarify how the PFMI address
stablecoin arrangements when a settlement asset carries risk in addition to credit and liquidity
risk (i.e. market risk).
Table 1 summarises the preliminary analysis (subject to change and ongoing CPMI-IOSCO
review) on the application of the most relevant principles and Annex F to three high-level cases
of stablecoin arrangements.
62
11 CSD Applicable (to the extent that Applicable (to the extent that Applicable (to the extent that
the arrangements are the arrangements are the arrangements are
designed for asset designed for asset designed for asset
settlements) but challenging settlements) but challenging settlements) but challenging
to observe to observe to observe
12 Exchange-of-value Applicable (to the extent that
settlement systems the arrangements are Applicable (to the extent that Applicable (to the extent that
designed for to Payment the arrangements are the arrangements are
versus Payment (PVP) or designed for to PVP or DVP designed for to PVP or DVP
DVP settlements) but settlements) but challenging settlements) but challenging
challenging to observe to observe to observe
Table 1 is intended to provide a high-level summary of the issues that CPMI-IOSCO have
identified to date based on its preliminary analysis. CPMI-IOSCO do not intend for this summary
table to constitute guidance or legal advice on which developers of stablecoin arrangements
should rely when considering potential design choices. Going forward, CPMI-IOSCO are
analysing further how particular systemically important stablecoin arrangements may comply
with the PFMI. Some clarification or interpretation may help explain how systemically important
stablecoin arrangements may comply with the PFMI, but such clarification or interpretation would
not change the underlying principles that apply to a systemically important FMI. Such clarification
or interpretation would seek to explain how the PFMI apply to organisations providing novel but
systemically important FMI functions and to help such organisations understand what observing
the PFMI, at minimum, will require of their design choices.
The PFMI Responsibilities are also applicable to authorities responsible for stablecoin
arrangements. In particular, Responsibility E provides that “central banks, market regulators,
and other relevant authorities should cooperate with each other, both domestically and
67 To the extent that entities within stablecoin arrangements interact with other FMIs.
63
internationally, as appropriate, in promoting the safety and efficiency of FMIs.” Responsibility E,
together with its Key Considerations, provides a strong basis for cooperation among relevant
authorities for the regulation, supervision and oversight of systemically important stablecoin
arrangements.
As a stablecoin arrangement may have other features and provide services in addition to those
of a payment system, and the services may be provided on a cross-border basis, a wider range
of authorities may have an interest or responsibility vis-a-vis the stablecoin arrangement than
only payment system supervisors and oversight authorities. In addition, partially distributed or
highly distributed stablecoin arrangements may pose additional challenges. Therefore, it is
important to identify and engage the potentially broader set of relevant authorities. Hence the
range of authorities that should cooperate could be wider. CPMI-IOSCO are analysing further
whether additional considerations would be helpful to achieve appropriate cooperation among
relevant authorities.
64
IOSCO
On 23 March 2020, IOSCO published a report on Global Stablecoin Initiatives.68 The report
includes a discussion, at a high level, of how some of the relevant IOSCO Principles, Standards,
Recommendations and Guidance (IOSCO Standards) could apply to GSC proposals. For
purposes of the discussion on IOSCO Standards, the report used a hypothetical case study of a
stablecoin that could act as a global currency and potential financial infrastructure used for
domestic and cross-border payments, which uses a reserve fund and intermediaries to seek a
stable price vis a vis a basket of low volatility currencies. The report’s discussion of how this
hypothetical case study could interact with the remits of securities regulators could apply to other
GSC proposals, depending on their specific design and their legal and regulatory characteristics
and features. The report does not provide an account of how any particular jurisdiction’s
domestic regulation might apply to GSC proposals.
The majority of IOSCO’s report explores the potential application of IOSCO Standards to the
“back-end” of a hypothetical GSC, including the management and structuring of the reserve fund;
the creation and redemption of coins; coin arbitrage; and potential secondary market trading of
the coin. The report also contains a preliminary analysis of the CPMI-IOSCO Principles for
Financial Market Infrastructures.
Stablecoin arrangements that use a reserve fund to keep the secondary market price in line with
the value of the referenced basket or assets in the reserve may have features that resemble a
collective investment scheme, a securitised product, or other type of security. Certain
characteristics of these reserve funds may be similar to money market funds, particularly with
respect to portfolio construction, and market intermediaries may be considered to be acquiring
a debt instrument. On this basis, Recommendations 1, 3, 9, 13 and 14 of the IOSCO Policy
Recommendations for MMFs (2012) may be the most relevant.
In a stablecoin arrangement, a reserve fund or the rights of the authorised participants (APs)
with respect to the reserve fund, might be considered a security (e.g. an MMF, other collective
investment scheme, or other security). Any third-party participants in GSC proposals involving
such securities need to assess whether they are also providing regulated activities, including
safeguarding activities. Intermediaries and other firms (such as investment firms, custodians,
banks, payment services, e-money or trust companies) that hold or control client assets as part
of their regulated business need to follow specific rules designed to protect client assets.
65
Principles for the Regulation of Exchange Traded Funds (2013)71
Certain features of a reserve fund may exhibit similar characteristics to exchange traded funds
(ETFs) and other exchange traded products (ETPs). For example, a stablecoin arrangement
may use intermediaries acting similarly to APs to effect transactions of fiat currency and the coin,
facilitating redemptions and providing liquidity to coin holders. The role of the APs includes
establishing the demand for a coin and distributing the coin received through third party platforms
to customers. This could be akin to the role of APs that purchase and redeem ETF shares, and
distribute ETF shares to the public. IOSCO’s Principles for the Regulation of Exchange Traded
Funds (2013) make a number of observations on the role of APs and set out nine principles that
regulators could consider for ETFs.
Coin distribution could occur through APs that directly interact with the reserve fund (to mint or
burn the coin) and such APs may use crypto-asset trading platforms (CTPs) to buy and sell the
coin. As such, CTPs could be the main secondary market where users buy and sell coins. Where
a securities regulatory authority has determined that a crypto-asset or an activity involving a
crypto-asset falls within its jurisdiction, the basic principles or objectives of securities regulation
should apply. The 2020 report describes some of the issues and risks associated with the trading
of crypto-assets on CTPs. It describes key considerations and provides toolkits that are intended
to assist regulatory authorities who may be evaluating CTPs within the context of their regulatory
frameworks. CTPs may need to be regulated as trading venues and meet relevant domestic
requirements and international standards.
If any stablecoin pricing, or the value of any assets that are linked to the stablecoin, is used in
the future to price or be the basis for the price of certain financial instruments, including those
traded on a regulated venue (such as a fund or derivatives), there is the possibility the stablecoin
or the value of the linked assets could become a benchmark. In turn, depending on the
jurisdiction, the administrator of the benchmark might be carrying out regulated activity and need
to be authorised. The principles outlined in this work are useful as a starting point to understand
the areas of risk and key mitigants to address inherent risks in calculating and publishing prices.
IOSCO’s work on derivatives products may be relevant in two distinct ways. First, a coin itself
could potentially be regarded as a derivative, deriving its value from an underlying basket of
financial assets (i.e. a reserve fund). Secondly, future derivatives products could be introduced
that would use the coin as the underlying asset from which they derive their value.
71 IOSCO (2013), Principles for the Regulation of Exchange Traded Funds, June.
72 IOSCO (2020), Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms, February
73 IOSCO (2013), Principles for Financial Benchmarks, July
74 IOSCO (2011), Principles for the Regulation and Supervision of Commodity Derivatives Markets, September
66
The following three IOSCO principles on commodity derivatives are potentially relevant: 1)
economic utility (contracts should meet the risk management needs of potential users and
promote price discovery of the underlying commodity); 2) transparency (information concerning
a physical commodity derivatives contract's terms and conditions, as well as other relevant
information concerning delivery and pricing, should be readily available to authorities and market
participants; and 3) review of evolving practices (authorities should have, or contribute to, a
process to review the perimeter of regulation to ensure that they have the power to address
evolving trading practices that might result in a disorderly market).
Given the cross-border nature of global stablecoins, it will be important that markets regulators
and other financial supervisors cooperate amongst themselves to reduce the risk of regulatory
arbitrage through fragmentation. These regulatory cooperation tools, both with other securities
regulators and with banking and payments regulators, can strengthen the ability of authorities to
protect their domestic investors and ensure stablecoin market transparency.
In this context, the IOSCO Principles covering Cooperation in Regulation could be important
when assessing global stablecoin arrangements, by encouraging a broad range of cross-border
cooperation and information sharing. The relevant principles are:
■ IOSCO Principle 13 – The Regulator should have authority to share both public and
non-public information with domestic and foreign counterparts.
■ IOSCO Principle 15 – The regulatory system should allow for assistance to be provided
to foreign regulators who need to make inquiries in the discharge of their functions and
exercise of their powers.
Enforcement Cooperation
IOSCO’s Multilateral MoU Concerning Consultation and Cooperation and the Exchange of
Information (MMoU) and the Enhanced Multilateral MoU Concerning Consultation and
Cooperation and the Exchange of Information (EMMoU) will be relevant and may facilitate
exchange of relevant information amongst members with respect to enforcement.
The MMoU, developed based on the Principles 13, 14 and 15 above, assists the signatories to
the MMoU to exchange confidential information (including banking records, data, documents,
metadata, recordings, and images, among others) to help them enforce their laws and
regulations. Currently, there are 124 authorities that are signatories to the MMoU, both from
developed and developing jurisdictions. IOSCO’s MMoU Screening Group assesses and
determines whether the prospective signatory fully complies with the standards of cooperation.
Only applicants that fully comply with the standards of cooperation are admitted as signatories.
IOSCO’s MMoU Monitoring Group, monitors jurisdictions’ adherence to the MMoU.
67
The IOSCO Enhanced MMoU (EMMoU) covers new areas, including subscriber records held or
maintained by internet service providers, and other electronic communication providers, who are
located within the jurisdiction of the requested authority, that identify subscribers (name and
address), payment details, length of service, type of service utilised, network addresses, and
session times/dates and durations.
Supervisory Cooperation
Due to their inherently cross-border nature, global stablecoins are also likely to create the need
for cooperation in the area of supervision. Supervisory cooperation will therefore be essential to
enable cooperation and coordination between regulatory authorities. In that context, IOSCO’s
Principles on Cross-Border Supervisory Cooperation published in 2010 can assist securities
regulators in determining the form of cooperation best suited to the regulatory task at hand and
by outlining the critical issues that regulators should agree upon outside of enforcement matters.
These Principles remain valid in the context of stablecoins as they can assist financial regulators
in identifying common concerns.
One tool – for example – that is discussed within the Report is the use of supervisory colleges.
In the securities area, IOSCO published a Report on Supervisory Colleges for Credit Rating
Agencies in 2013,75 noting the challenges that the dispersion of internationally active CRAs
present for domestic supervisors and promoting the use of colleges for these internationally
active CRAs. Global stablecoins may similarly have global reach and raise novel risk issues; and
can benefit from the supervisory cooperation applied to CRAs as indicated in IOSCO’s Report.
Deepening supervisory cooperation was identified as a key area to explore further by IOSCO
and its Members in its Report on Market Fragmentation and Cross-Border Regulation.76 IOSCO
will therefore investigate ways to encourage supervisory cooperation, beginning with a review,
as appropriate, of the 2010 Principles for Supervisory Cooperation and a review of the use of
supervisory colleges to identify good practices in the establishment and conduct of existing and
future colleges. Where appropriate, IOSCO will also identify practical issues which could be
raised or usefully addressed through colleges and potential ways to increase their use. This work
may provide further insights for the supervision of stablecoins.
Finally, IOSCO’s 2015 Report on Cross-Border Regulation provides authorities with a toolkit of
cross-border regulatory options and considerations. This toolkit has been used by authorities in
other financial sectors and may assist regulators in developing, implementing and evaluating
cross-border approaches with regards to stablecoins too in the future.77
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Annex 5: Potential elements that could be used to determine
whether a stablecoin qualifies as a GSC
A stablecoin’s global systemic importance could be measured in terms of the impact that a
stablecoin arrangement’s financial or operational disruptions, or failure, can have on the global
financial system and wider economy.
Given that a stablecoin may be used as a means of payment or store of value, and could be
used in multiple jurisdictions, the criteria to be considered in determining whether a stablecoin
qualifies as a GSC should take into account the potential uses in multiple jurisdictions.
The potential elements set out below that could be used to determine whether a stablecoin
qualifies as a GSCs build on the criteria that are often considered in determining the need for or
degree of regulation, supervision, and oversight of FMIs (PFMI, 2012), and global systemically
important banks (BCBS, 2013). They include factors that could contribute to proliferation and
considerations for authorities to determine whether a stablecoin has the potential to expand
reach and adoption across multiple jurisdictions and has the potential to achieve substantial
volume. Such potential elements are:
(x) Integration with digital services or platforms (e.g. social networks, messaging
applications)
(xi) Available alternatives to using the GSC as a means of payment at short notice
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