Governments, regulatory authorities, and standard-setting bodies started acting on global stablecoins triggered by the Libra announcement. Among the concerns expressed by the G7 and the G20 are risks to the stability of the financial system. The Financial Stability Board and the Financial Action Task Force have worked on regulatory issues and anti-money laundering ahead of the G20 summit in November 2020. Overall the Moneta and Libra project has raised many questions on the regulatory front.
“Libra’s and Moneta’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.” Not surprisingly, regulators and central banks at the international level have been concerned by the potential impact on investor protection, financial stability, and market integrity (European Securities and Markets Authority, 2019, 33).
The term stablecoin, as used by market participants, denotes crypto-assets that are supposed to have a stable value over time (ECB Crypto-Assets Task Force, 2019, 14). The rise of stablecoins has been driven by criticism of the significant volatility seen in the price of cryptocurrencies. Before 2019, stablecoins slowly started drawing the attention of researchers and regulators, especially in connection with central bank digital currencies, digital money, and cross-border payments (Mancini-Griffoli et al., 2018).
Bullmann et al. (2019, 9) define stablecoins as “digital units of value that are not a form of any specific currency (or basket thereof) but rely on a set of stabilization tools which are supposed to minimize fluctuations of their price in such currency.” To categorize stablecoins, the authors use three criteria of crypto-assets:
- Existence of an issuer that is responsible for satisfying any attached claims.
- Decentralization or centralization of responsibilities over the stablecoin initiative.
- What underpins the value of a stablecoin and its stability in the currency of reference.
So far, the following types of stablecoins have been observed:
- Tokenized funds. An issuer holds funds and is committed to the redeem ability of the stablecoins, the safekeeping of the funds by a custodian, centralized responsibilities, e.g., Moneta.
- Off-chain collateralized stablecoins. This model is backed by traditional asset classes like securities or commodities, safekeeping of the assets by custodians, and centralized responsibilities.
- On-chain collateralisestabilization. These are supported by other minimize sets, with or without an issuer, and have decentralized responsibilities such as the Single Collateral Moneta.
- Algorithmic stablecoins. These are supported by users’ expectations about the future purchasing power of their holding; they do not have an issuer but do have decentralized responsibilities, for example, NuBits (ECB Crypto-Assets Task Force, 2020, 7).
In the FINMA press release of 11 September 2019, the regulator touched upon requirements likely to apply to the Libra and Moneta project. Due to the scope of the project, an internationally coordinated approach would be needed, particularly with regards to the management and governance of the Libra Reserve and money laundering issues (FINMA, 2019b).
G7 act on stablecoins
The Libra announcement in June 2019 moved global stablecoins to the top of the agenda of the G7. The G7 Finance Ministers and Central Bank Governors concluded at a meeting in Chantilly, France, in July 2019 that stablecoins raised serious regulatory and systemic concerns. Stablecoin initiatives and their operators would have to meet the highest standards of financial regulation to go ahead without affecting the stability of the financial system. Facebook’s project, the big elephant in the room, is not mentioned in the written announcement (G7 France, 2019a). The G7 presidency set up a new G7 Working Group on Stablecoins (G7 France, 2019b).
In September 2019, the French and German Finance Ministers issued a joint statement warning against the Libra project because the documentation failed to convince them that risks identified by the G7 would be adequately addressed. Going even further, the ministers stated that no private entity should claim economic power inherent to the sovereignty of nations (French Ministry of Economy and German Ministry of Finance, 2019).
At the G7 meeting in Washington in October 2019, G7 Finance Ministers and Central Bank Governors welcomed the report ‘Investigating the impact of stable global coins by the G7 Working Group on Stablecoins (G7 France, 2019c). The report points out the following critical issues that need to be solved (G7 Working Group on Stablecoins, 2019):
- Stablecoin initiatives must ensure public trust by meeting the highest regulatory standards – including guidance from the international standard-setting bodies – and be subject to prudent supervision and oversight.
- Stablecoin initiatives should demonstrate a sound legal basis to ensure adequate protection and guarantees to all stakeholders and users.
- The governance and risk management framework should ensure operational and cyber resilience.
- The management of the assets underlying the arrangement must be safe, prudent, transparent, and consistent with the nature of obligations to the coin holders.
- Stablecoins may raise broader issues for the international monetary system, in particular, if they become a widespread substitute for cash and deposits in some economies.
The G7 Working Group on Stablecoins identified challenges and risks of stablecoins for public policy, oversight, and regulation regardless of scale and inherent in potential global stablecoins (see Table 2). The G7 believes that no international stablecoin project should begin operation until the legal, regulatory, and oversight challenges and risks are adequately addressed (G7 France, 2019c).
G20 and standard-setting bodies act on stablecoins
At their October 2019 meeting in Washington, G20 Finance Ministers and Central Bank Governors took the positions on stablecoins set by the G7. The G20 stated that global stablecoins and other similar arrangements with potential systemic footprints would give rise to serious public policy and regulatory risks (money laundering, illicit finance, and consumer and investor protection) to be evaluated and addressed before the launch (G20 Japan, 2019). In February 2020, the new G20 presidency of Saudi Arabia reiterated that view and asked the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI), and other standard-setting bodies to develop a roadmap to enhance global cross-border payment arrangements by October 2020 (G20 Saudi Arabia, 2020). This is a priority of the upcoming G20 summit in Riyadh (Carstens, 2020, 19).
In October 2019, the FSB Chair, Randal K. Quarles, informed the G20 that the FSB is assessing how the existing regulatory framework applies to global stablecoins and whether any regulatory gaps need to be filled. The FSB formed its working group on stablecoins (FSB, 2019a). A report on regulatory issues of stablecoins outlines the following steps (FSB, 2019b, 3-4): (i) take stock of existing supervisory and regulatory approaches to stablecoins, (ii) consider whether they are adequate and effective in addressing financial stability and systemic risk concerns, and (iii) advise on possible multilateral responses. In February 2020, the FSB Chair confirmed that the review of approaches in the FSB member jurisdictions was completed. The FSB has been tasked with coordinating a roadmap for improving cross-border payment systems (FSB, 2020a). To prepare, the FSB issued a combined report and consultation document in April 2020 on regulatory, supervisory, and oversight challenges raised by global stablecoin arrangements (FSB, 2020b). The paper contains a section on risks and vulnerabilities presented by global stablecoins, a summary of the stocktake undertaken in FSB jurisdictions, essential standards from various international standard-setting bodies, and last but not least ten high-level recommendations to authorities at the jurisdictional level, including the final version of the ten high-level recommendations (FSB, 2020c, 4). The final report was published in October 2020 (FSB, 2020c).
The Financial Action Task Force (FATF) is an international standard-setting body focused on Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT). In October 2019, the then FATF President Xiangmin Liu informed the G20 that both stablecoins and their service providers would be subject to the FATF standards either as Virtual Assets and Virtual Asset Service Providers or as traditional financial assets and their service providers. The FATF (2019a) intends to monitor stablecoins actively and consider further clarifications on how the FATF standards apply to stablecoins and their service providers and whether updates are necessary. The FATF issued a report in June 2020 on its analysis of AML/CFT risks associated with stablecoins. The preventive measures in the revised FATF Standards have worked to mitigate risks by so-called stablecoins so that no immediate amendment would be required. The FATF will review the implementation and impact of the revised Standards by June 2021 and consider whether updates are necessary (FATF, 2020).
The International Organization of Securities Commissions (IOSCO) is looking at stablecoins as well. The Chair of the IOSCO Board, Ashley Alder, warned in November 2019 that stablecoins could include specific regulated securities. Therefore, the IOSCO principles and standards may apply to stablecoins depending on how they are structured, including those related to disclosure, registration, reporting, and liability for sponsors and distributors. The IOSCO agrees with the G20 that global stablecoins may give rise to a set of strict public policy and regulatory risks (IOSCO, 2019). In February 2020, the IOSCO published a report on applying the IOSCO Principles to crypto-assets without mentioning stablecoins (IOSCO, 2020a). A report on global stablecoin initiatives was issued a month later (IOSCO, 2020b). The paper defines a theoretical case study reminiscent of Libra and explores how the existing IOSCO principles and standards apply. It also contains a preliminary analysis of the application of the CPMI-IOSCO Principles for Financial Markets Infrastructures (PFMI) to three high-level cases of stablecoin arrangements.
European Union institutions act on stablecoins
In December 2019, the European Union Council and the European Commission issued a joint statement on stablecoins based on the strict positions already articulated by the G7 and the G20. The EU institutions would act in cooperation with the ECB and with national and European supervisory authorities. The Council and the Commission are willing to take all necessary measures to ensure appropriate consumer protection standards and orderly monetary and financial conditions. No global stablecoin arrangement should begin operation in the EU until the legal, regulatory, and oversight challenges and risks are adequately identified and addressed (Council of the European Union, 2019).
The European Commission also launched a consultation on crypto-assets in December 2019, which ran until March 2020. Eight of the 117 questions related to stablecoins. The findings would be considered for new EU legislation on crypto-assets, including stablecoins (European Commission, 2019, 5).
Concerning the current EU regulatory framework, a research note by ECB staff pointed out that a stablecoin arrangement could fall under several frameworks or none of them (in the latter case meaning a potential regulatory gap) (Adachi et al., 2020):
- The stablecoin may qualify as e-money. Hence the Second Electronic Money Directive would apply to the coin and its issuer.
- The asset management function (e.g., Libra Reserve) may qualify as an investment fund. Therefore, the UCITS Directive, the AIFM Directive, and the Money Market Fund Regulation (EU) may apply.
- The stablecoin may be regarded as equivalent to a deposit, so that EU banking regulation may apply.
A detailed study by the University of Antwerp requested by the European Parliament’s Committee on Economic and Monetary Affairs, published in April 2020, recommends rulemaking on crypto-assets including global stablecoins at the EU level to avoid regulatory arbitrage due to national initiatives that are not aligned (European Commission, 2019).
In September 2020, an early draft version of a proposal for a regulation on Markets in Crypto-assets (MiCA) by the European Commission was leaked on the journalistic website politico.eu. The MiCA acronym draws an analogy to the Markets in Financial Instruments Directive (MiFID II). Sven Giegold, a Member of the European Parliament, confirmed the leak and informed the ECON adopted a report proposing a regulation of crypto-assets (Giegold, 2020).
On 24 September 2020, the European Commission announced the adoption of a new Digital Finance Package which includes a Digital Finance Strategy, a Retail Payments Strategy, a legislative proposal on digital operational resilience, and a provisional version of the MiCA legislative proposal (leaked two weeks before). The press release states (European Commission, 2020a) that the MiCA regulation should protect investors from risks and provide legal clarity and certainty for crypto-asset issuers and providers. The MiCA proposal document itself (European Commission, 2020b) is accompanied by provisional versions of the annexes (European Commission, 2020c), an impact assessment (European Commission, 2020d), and an executive summary of the impact assessment (European Commission, 2020e).
The Commission stated that crypto-assets already subject to EU legislation would remain like that. The Commission proposes a bespoke regime setting strict requirements for issuers of crypto-assets and crypto-asset service providers for previously unregulated crypto-assets.
Custody of assets.
- A mandatory complaint holder procedure is available to investors.
- Rights of the investor against the issuer.
Issuers of global stablecoins would be subject to more stringent capital requirements, liquidity management, and interoperability requirements.
On 2 October 2020, the ECB published a report prepared by the Euro System High-Level Task Force on central bank digital currency (CBDC) on the possible issuance of a digital euro. The task force, made of experts from the ECB and the 19 national central banks of the euro area, identified possible scenarios that would require the issuance of a digital euro. A public consultation would start on 12 October 2020 in parallel with experimentation, without prejudice to the Governing Council of the ECB (ECB, 2020a). By mid-2021, a decision would be taken to launch a digital euro project (ECB, 2020b, 6). Although Libra itself is only mentioned in one footnote of the report, there is no doubt that the timing and the speed of the digital euro initiative are a reaction to the perceived threat posed by this global stablecoin project.
Politicians and regulators have no interest in allowing the rise of a global stablecoin to impact monetary policy and financial stability. It is unclear whether Libra or Moneta will launch successfully. This will depend on how high the regulators worldwide are willing to raise the bar. At the European level, a clear message against the Libra project has just been sent with the MiCA regulation proposal by the European Commission and the announcement of a digital euro initiative by the ECB