Global financial regulators urge closer supervision of stablecoins

Global governments signaled their plans on Tuesday to tighten the leash on the world's largely unregulated cryptocurrency markets, in particular stablecoins, and said a coordinated framework is coming in October. 

The Financial Stability Board, an international body based in Basel, Switzerland, that coordinates financial regulation for the G-20 countries, said in a press release that "so-called stablecoins" and other crypto assets have functioned like risky securities, with investors treating them in much the same way, so they must be regulated in a similar fashion. The announcement follows a report the FSB published in February, where it warned that poorly regulated crypto markets could have a domino effect in other markets and threaten the health of the global economy. 

"Crypto-assets are predominantly used for speculative purposes and many currently remain mostly outside the scope of or in non-compliance with financial safeguards, of which participants of these activities should be fully aware," the FSB said. 

The FSB cited "recent turmoil" in crypto markets in its recommendation, noting that it "highlights their intrinsic volatility, structural vulnerabilities and the issue of their increasing interconnectedness with the traditional financial system." The price of bitcoin, the most widely traded cryptocurrency, has fallen more than 70% to $19,474, from over $67,000 in November, and trillions of dollars disappeared from the market in the "crypto winter" of the past several months. Crypto companies, including Coinbase, Gemini and Celsius, laid off over a thousand workers in recent weeks. Others, like Crypto.com, suffered hacks earlier this year. 

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The recommendations also come days after FSB representative Lael Brainard, vice chair of the Federal Reserve Board, said during a speech in London that she had concerns about the growing prominence of private, unregulated stablecoins as payments. However, Brainard said a centralized bank digital currency could be a potential way to "enhance stability" in the financial system. 

"Stablecoins should be captured by robust regulations and supervision of relevant authorities if they are to be adopted as a widely used means of payment or otherwise play an important role in the financial system," the FSB said, warning that a stablecoin widely adopted for use in payments across different countries could "pose significant risks to financial stability" without "high regulatory and transparency standards." 

The FSB said any stablecoins approved for widespread use should be required to "maintain at all times the reserves that preserve stability of value and meet relevant international standards." 

Stablecoins, cryptocurrencies whose price is supposed to be fixed and tied to the U.S. dollar in value, have been facing a crisis in public trust over the past few months. Binance, a leading crypto exchange company, is embroiled in a class action filed in June, with the plaintiffs alleging that it misled investors to believe its stablecoins were "safe" and backed by fiat currency. This proved untrue when TerraUSD (UST), promoted as a stablecoin consistently worth $1, lost its dollar peg and plummeted in value in May, taking with it the invested cash of thousands. Tether, another promoted stablecoin, also lost its dollar peg in May as panicked sellers withdrew billions of dollars from the coin. 

In October, the FSB said, it will share a report with the G-20 finance ministers and central bank leaders presenting these international standards, in an effort to close off "regulatory arbitrage" or loopholes that noncompliant crypto-dealing companies seeking to evade accountability would use by taking advantage of lax rules in different countries. 

Member countries represented in the FSB can ignore the recommendations. On its website, the FSB states that the body's "decisions are not legally binding on its members — instead the organisation operates by moral suasion and peer pressure." Reuters also reported that its actions lag those of the EU, which announced similar rules earlier this month to police the “Wild West” of crypto. 

Jon Cunliffe, a Bank of England deputy governor and chair of the Bank for International Settlements’ Committee on Payments and Market Infrastructures, set out guidance on the use of stablecoins that authorities hope will be adopted into national legislation around the world. 

Cunliffe offered the proposals Wednesday in an op-ed column for Bloomberg Opinion, writing with Ashley Alder, chair of the board of the International Organization of Securities Commissions, who will take over as chair of the U.K.’s Financial Conduct Authority in January. 

They said the “strong growth” in the value of money circulating in crypto markets makes links between those assets and the banking system a risk regulators shouldn’t ignore. “Stablecoin arrangements should have clear and direct lines of responsibility and accountability, for instance, by making clear what the responsible legal entity is (and who the people responsible for operating that entity are),” the op-ed said. 

— Bloomberg News contributed to this article