The cooperative body of the world central bank would integrate stablecoins into international standards for payment, clearing and settlement systems.
On July 13, 2022, the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) released a joint report on the regulation of settlement arrangements. stablecoins titled “Applying the Principles of Financial Market Infrastructures to Stablecoin Agreements” (the BIS Report). The BIS Report is the result of a consultation previously published in October 2021 (see this previous article for more It is intended for use by market participants when designing, developing and operating their products and services that are (or have the potential to become) systemically important after launch; and by regulators. regulation, oversight, and oversight when evaluating and overseeing stablecoin deals.
The BIS report comes to the conclusion, as proposed in the consultation, that stablecoin agreements (defined as “an agreement that combines a range of functions to provide an instrument intended to be used as a means of payment and/or reserve of value), should adhere to the Principles for Financial Market Infrastructures (PFMI). The PFMI, as defined by the BIS, is a set of 24 key international standards that the BIS has issued for financial market infrastructures (i.e. payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories) in order to enhance and preserve stability The BIS report guidance would generally implement a framework “same risk, same regulation” legal framework for stablecoin agreements that are considered systemically important financial market infrastructures.
The BIS report is structured around four of the 24 PFMI principles: governance, overall risk management, settlement finality and monetary settlements. Although not all PFMI principles are covered, arrangements of systemically important stablecoins primarily used to make payments should comply with all relevant PFMI principles. Although it depends on a jurisdiction’s specific approach, in general, a payment system is considered systemically important if it has the potential to trigger or transmit systemic disruptions.
In accordance with the four stated principles, a systemically important stablecoin arrangement should:
- Use appropriate governance, including clear documentation and disclosure of ownership and management structures, control, lines of accountability, human intervention capabilities, operations and affiliations
- Develop appropriate risk management and mitigation frameworks and tools to address the material risks in an integrated and comprehensive manner (e.g. legal, credit, liquidity, operational and other risks) that it bears and poses to customers and affiliated entities (“institutional interdependencies”)
- Provide clear and final settlement (at a minimum at the end of value date, regardless of the operational settlement method used) and manage risks arising from a mismatch between technical and legal finality
- Minimize and strictly control credit and liquidity risk arising from the use of non-central bank money
The findings of the BIS report are not binding and countries have the option of implementing the guidance through compliant laws, rules and regulations, or structuring their own approaches. Additionally, the guidelines do not apply to multi-currency stablecoins denominated or pegged to a basket of fiat currencies, which are subject to further assessment. The CPMI and IOSCO said they would continue to “review regulatory, oversight and oversight issues associated with stablecoin agreements and, where necessary and appropriate, coordinate with other standard setters to filling the gaps in standards”.
Sir Jon Cunliffe (CPMI Chairman and Deputy Governor for Financial Stability at the Bank of England) and Ashley Alder (Chairman of IOSCO, CEO of the Hong Kong Securities and Futures Commission and future Chairman of UK Financial Conduct Authority) commented in a joint editorial that “it is important that lessons are learned and that these standards are quickly reflected in national legislation, before stablecoins become systemic.”
Commissioner Caroline D. Pham of the US Commodity Futures Trading Commission commented positively on the BIS report, noting that “in light of recent market events…the BIS report…is an important step in establishing international standards for stablecoin agreements and a consistent regulatory framework that protects the global financial system.
The Financial Stability Board (FSB) – a global regulator that includes IOSCO – applauded the BIS report, noting that it is “a major step forward in enforcing the” same activity , same risk, same regulation “” to systemically important stablecoins that are used primarily to make payments. On the horizon, the FSB plans to propose robust rules for digital assets in October 2022, due to their growing interconnectedness with the traditional financial system. Stablecoins in particular must “be held to high regulatory and transparency standards, maintain at all times reserves that preserve stability of value, and meet relevant international standards.”
Lawmakers Are Turning to Stablecoins
Meanwhile, across the world, lawmakers are moving quickly to rein in stablecoins by providing clearer oversight channels and stricter operational guidelines:
- Japan: Legislation prepared by the Financial Services Agency (FSA) was passed on June 3, 2022, defining the legal status of stablecoins. The new law – which will come into effect in 2023 – defines stablecoins as digital currencies that must maintain a peg to the yen or other legal tender, must be redeemable at face value, and must comply with registration requirements. Stablecoin issuers are limited to licensed banks, money transfer companies, and trust companies; and stablecoin intermediaries or distributors are required to register and take strict anti-money laundering and anti-terrorist financing (AML/CFT) measures.
- Hong Kong: On January 12, 2022, the Hong Kong Monetary Authority (HKMA), Hong Kong’s primary regulator for banks and payment systems, released a discussion paper seeking public input on its proposed approach to regulation. stable coins. The HKMA outlines its views on the development of stablecoins and offers initial issues and perspectives for establishing an effective regulatory framework for stablecoin activities in Hong Kong.
- European Union: On June 30, 2022, the Crypto Asset Markets Bill (MiCA) was provisionally approved by the European Commission, EU lawmakers and EU member states. The MiCA would impose strict operational and prudential rules on stablecoin issuers, such as safe and sufficient liquidity reserves.
- UK: On July 20, 2022, the Financial Services and Markets Bill was introduced in the lower house of parliament and aims to regulate certain types of digital settlement assets and stablecoins as a form of payment within the regulated perimeter. of the UK payment system.
- United States: Key members of the House Financial Services Committee are negotiating bipartisan stablecoin legislation that would include a new licensing regime, dollar-for-one reserve requirements, anti-money laundering requirements, and custodial portfolio standards.