An international body tasked with monitoring and making recommendations for financial stability has called for a regulatory framework for cryptocurrencies amid the recent turmoil in markets.
The Basel-based Financial Stability Board (FSB) on Monday said so-called stablecoins need to be held to high regulatory and transparency standards, while maintaining “at all times the reserves that preserve stability of value and meet relevant international standards.”
As the FSB prepares for a report to present to the G20 Finance Ministers and central bank governors in October, it found that the failure of a crypto market player may have spillover effects on traditional finance such as short-term funding markets, according to its statement.
The international financial watchdog’s comments come as investor confidence in stablecoins has plummeted since the Terra-UST fiasco. In what many consider a crypto winter, Bitcoin’s price fell below US$20,000 in morning trade on Tuesday in Asia, eroding gains made last week, on fears of a glut of the coin and U.S. inflation data due on Wednesday.
The market turmoil, the FSB said, reflects the asset class’s intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system.
“Crypto-assets and markets may perform an equivalent economic function to one performed by instruments and intermediaries of the traditional financial sector,” the FSB said, adding that crypto-related assets are “predominantly used for speculative purposes.”
The FSB warned a stablecoin that’s widely used in multiple jurisdictions could pose a threat to financial stability in the absence of adequate regulation.
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The FSB also stressed the importance of international cooperation and coordination, saying that it will release a public consultation report that outlines recommendations for consistent international supervisory approaches.
“For the broader crypto industry, compliance is a difficult task because at the moment law and regulation are not perfectly clear and the emerging rules are being deliberated as we speak,” Michael Shing, director of risk management of Taipei-headquartered XREX Inc., which operates fiat-crypto exchange XREX, told Forkast.
“Sometimes we run into technical nuances that require regulatory clarity, but we usually manage to sort them out with regulators over time,” said Shing, who previously spent over a decade with the U.S. Federal Reserve as an analyst and senior risk specialist.
Shing said although stablecoins are a type of cryptocurrency, people do not see stablecoins as a speculative asset type.
“They look to use stablecoins as a safe store of value, a stable unit of account, and a reliable medium of exchange. Therefore, stablecoins must fulfill high regulatory standards,” Shing said.
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The FSB is not the only international body that has cautioned against the risks associated with stablecoins.
The Bank for International Settlements said in a report last month that stablecoins are always in search of a nominal anchor, to “piggyback on the credibility provided by the unit of account issued by the central bank.”
“The fact that stablecoins must import the credibility of central bank money is highly revealing of crypto’s structural shortcomings,” BIS general manager Agustin Carstens told reporters at a June briefing prior to the report release. “Only the central bank can provide the nominal anchor that crypto craves.”
Caroline Pham, commissioner of the U.S. Commodity Futures Trading Commission, said at a Forkast+ event in June that the priority is “figuring out what can we do right now to help make sure that the retail public is protected and that this contagion does not spread any further.”
U.S. Treasury Secretary Janet Yellen has repeatedly said that it’s “highly appropriate” to have a framework ready by the end of this year.
In November 2021, the U.S. President’s Working Group on Financial Markets published a report on stablecoins, urging the Congress to act quickly to enact relevant legislation.
“We foresee legislative efforts receiving not only bipartisan support but also industry support,” Shing of XREX said.
European officials are also actively watching the space.
In June, European Union officials agreed to the Markets in Crypto-Assets (MiCA) law, placing cryptocurrencies, issuers and service providers under what appears to be the bloc’s first regulatory framework for the industry. The rules are expected to kick in as early as 2024.