What has happened

IOSCO, the international policy forum for securities regulators and global standard setter for securities regulation, has issued a report, entitled Global Stablecoin Initiatives, in which it examines the regulatory issues arising from the use of global stablecoins and explores how its existing principles and standards could apply to them.

What does this mean

The report states that global stablecoin initiatives may, depending on their structure, present features typical of regulated securities or other regulated financial instruments or services.

The paper starts with an overview of different stablecoin designs, before moving to a hypothetical case study that raises many global financial regulatory issues. This hypothetical case study is based on a hypothetical stablecoin used for domestic and cross-border payments which uses a reserve fund and intermediaries to achieve a stable price vis-à-vis a basket of low volatility currencies.

The paper then sets out how this hypothetical case study could interact with the perimeter of securities market regulators' remit. It also explores how the IOSCO principles and standards could apply to global stablecoin proposals, such as the one in the hypothetical case study, and then assesses the broader implications for securities regulators.

The issues are grouped into four broad categories, with the first three mapping IOSCO's objectives, namely: reducing systemic risks, ensuring market integrity and resilience, and protecting consumers and investors.

Other relevant risk categories are also assessed at a high level, including cyber risk and operational resilience, with the report noting that many firms dealing in cryptoassets have lost assets owing to mismanagement or lack of operational controls, security strategies and procedures.

"Stablecoin issuers should be able to explain how they will act to mitigate operational resilience risks, including internal vulnerabilities and threats. Issuers should be able to articulate the strategic operational risk model for both their own organisation as well as the ecosystem more broadly, as well as what plans they have in place should a breach, such as a hack or data loss, occur," the report said.

The report then turns to risks in respect of governance, culture, competition and market access, data, ethics, and anti-money laundering and counter-terrorist financing.

IOSCO concludes that a global stablecoin that would be widely adopted could create benefits to market participants, including consumers and investors, but also "exacerbate existing risks and create new risks in financial markets".

"Stablecoin proposals could, in the long-term, replicate existing financial products and services with the stablecoin ecosystem as a new payment medium or core component of market infrastructure," the report said.

IOSCO added that it also intends to work with international bodies and standard setters, such as the Financial Stability Board, to better understand stablecoin proposals and risks.

In parallel, IOSCO announced that it had worked with the Committee on Payments and Markets Infrastructure (CPMI) to carry out a separate preliminary analysis on the application of the Principles for Financial Market Infrastructure (PFMI) to stablecoin arrangements. This analysis concluded that the PFMI apply to global stablecoin arrangements where such arrangements perform systemically important payment system functions or other FMI functions that are systemically important; and could therefore apply to the hypothetical case study.

Next steps

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