Global Stablecoins have become a significant issue for governments
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- The central bank of China is worried that private stablecoins could disrupt financial stability. China is taking the lead, having established a proactive stance towards evaluating its own digital leaders
- The G7, G20, and Financial Stability Board are of the opinion that global stablecoins have the potential to facilitate cross-border payments
- According to a report from the BIS, stablecoins should adhere to the same regulations governing traditional payment methods, aligning with China’s philosophy: equal business, equal rules
- During the Fourth G20 Finance Ministers and Central Bank Governors meeting, lawmakers asserted that stablecoins should not operate until all pertinent issues are resolved
As major tech companies delve deeper into financial markets, global regulatory bodies are increasingly interested in regulating stablecoins, with Western policymakers turning to an unexpected regulatory example: China.
While it’s uncommon for Western nations to seek policy guidance from Beijing, the U.S. is striving to establish a federal framework for stablecoin issuers. The Bank for International Settlements (BIS) suggests that stablecoin payment systems should comply with international standards for payments, clearing, and settlement.
At a recent conference, Agustín Carstens, the head of BIS, mentioned Facebook and Diem specifically, stating,
“Big Tech’s extensive networks could trigger rapid and widespread adoption,”
Agustín Carstens remarked
“This could further centralize market power among a few entities, jeopardizing financial stability, fair competition, and data governance.”
The BIS Head added,
“In light of the rise of stablecoins, the international regulatory framework has sought to better understand these new players and the risks they may introduce to the financial system,”
In this regard, China is ahead of the West, having devised a thorough method to examine its digital powerhouses, Tencent and Alipay, which now dominate around 94 percent of China’s digital payment landscape, prompting intervention from Chinese authorities to address unfair competition.
Notably, Yi Gang, the governor of the People’s Bank of China, highlighted that big tech firms with unrestricted access to consumer data are “obligated to establish a financial holding company that incorporates all subsidiaries involved in financial operations,” during the same conference. “This could facilitate a separation of financial activities from technological services, thereby lessening the direct link to their broader operations.”
Diem aims to navigate these regulatory challenges this year, thereby compelling the West to identify new supervisory methodologies that can evaluate Big Tech’s actions in financial markets and ensure accountability for any violations.
On its end, the European Commission has introduced legislative proposals primarily targeting monopolistic conduct. EU lawmakers are also working on protective measures for investors purchasing cryptoassets, such as Denmark’s e-Money.com stablecoins (eEUR / eCHF / eNOK / eSEK / eDKK), which have committed to transparency and compliance by releasing audits verifying that each stable token is supported by real bank deposits and government bonds retained in commercial banks.
The safeguards that followed the news of Diem’s emergence include anti-money laundering protocols, rights for redemptions, and disclosure obligations — all aimed at establishing a secure crypto environment. These measures, along with the political backlash against Facebook’s payment initiative, have delayed Diem’s launch but have not halted it, leaving the question of financial oversight unresolved.
China’s model is appealing because it delineates a specific entity within major tech firms from which financial regulators can request information and impose penalties if deemed necessary. In contrast, merely monitoring the activities of Big Tech in the market does not prevent them from aggregating consumer data and utilizing it to gain a competitive edge.
China, holding a seat at the FSB, is already working on standards for global stablecoins like Diem. Central bank governors are advocating for the FSB to act as a forum where regulators on data, antitrust, and finance can engage in discussions and formulate policies for Big Tech’s entry into finance.
Despite expressing concerns, the G7, G20, and Financial Stability Board are optimistic about stablecoins’ potential to facilitate cross-border payments and have tasked the CPMI and IOSCO with establishing standards for stablecoin frameworks.
The report titled ‘Application of the Principles for Financial Market Infrastructures to stablecoin arrangements‘ (https://www.bis.org/cpmi/publ/d198.htm) released by the Committee on Payments and Market Infrastructures (CPMI) and International Organisation of Securities Commissions (IOSCO) outlines standards for stablecoins regarding governance, risk management, and the assurance of payment settlements.
IOSCO has urged clarity concerning who holds responsibility for stablecoin regulations. The regulatory framework governing stablecoins will significantly influence the sector’s growth, although the timeline and specifics of regulations in major markets—particularly the U.S. and EU—stay uncertain. For instance, the EU is negotiating new regulations for crypto assets that will mandate stablecoins like the aforementioned eMoney.com Stablecoins, which are to function as payment means, to predominantly invest their reserves in cash and very low-risk government securities.
The BIS announcement mentioned that individual jurisdictions can determine whether they allow stablecoin activities. Should they opt to permit it, and if the arrangement might be deemed systemic, then the PFMI would apply as outlined in the released guidance, according to the statement.
Acknowledging that the characteristics and functions of stablecoin systems might evolve, some concerns raised in the report may necessitate further clarification and examination in the upcoming years. The report also recognizes the objectives established by the Financial Stability Board (FSB) for addressing the cost, speed, and transparency challenges present in the sector, aimed for completion by 2027.
For their part, the G20 finance ministers and central banks reiterated their support for the FSB’s initiatives, encouraging the organization to assess whether any revisions to stablecoin regulations or guidance are warranted. A review of the FSB’s recommendations is slated for 2023.
The CPMI and IOSCO have invited public input, requesting comments and answers to a series of questions presented in the report concerning its clarity. Feedback can be sent to the CPMI (cpmi@bis.org) and IOSCO (consultation-03-2021@iosco.org) Secretariats by December 1.
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