Stablecoins could be forced to centralize issuance and major crypto platforms broken up under plans put forward by the Financial Stability Board (FSB) Tuesday.
The Financial Stability Board, a watchdog agency and standard setter for the global financial system supported by central banks and finance ministries, wants to see a comprehensive international rulebook in the aftermath of recent crypto market turmoil, taking aim at conflicts of interest in multi-faceted operations and algorithmic stablecoins like the now-collapsed terraUSD.
“The current ‘crypto winter’ has reinforced our assessment of existing structural vulnerabilities in these markets,” Klaas Knot, the Dutch central banker who chairs the FSB, said in a letter to the finance ministers of the world’s 20 biggest economies.
He was referring to FSB concerns over liquidity mismatches, high leverage and inappropriate business models in the highly connected crypto ecosystem.
“This turmoil has once more underlined the need for a comprehensive approach to crypto-asset regulation,” Knot added, after a volatile year that saw the price of major assets like bitcoin (BTC) and ether (ETH) tumble, and the total collapse of companies like crypto lender Celsius Network. Tuesday’s reports are a “major step” towards that framework, Knot added.
A report published for consultation by the FSB Tuesday calls for jurisdictions across the world to extend existing financial norms and develop new ones for novel crypto risks.
It puts off delving deeply into new areas like decentralized finance (DeFi), promising a fuller policy assessment next year, but warns that failure to disclose governance roles can prevent regulators from finding out who’s responsible in some supposedly decentralized structures.
The report said some crypto companies are already breaching the law by combining traditionally separate activities like trading, lending, custody and brokerage, and called on national authorities to step in and break them up if there are heightened risks or conflicts of interest.
“Various crypto-asset activities are often bundled together within a single entity, sometimes in non-compliance with existing regulations,” the report said. “Authorities should enforce their powers and use their tools as appropriate and in line with jurisdictional legal frameworks, including disaggregation and separation of certain functions.”
The FSB warns of extra risks when wallet providers offer services for stablecoins – cryptocurrencies which seek to maintain their value against conventional assets such as the U.S. dollar. Disruptions to a wallet service could allow for malicious transfers, potentially leading to a stampede from panicking customers, and there’s often no clarity on what happens if a provider goes bankrupt, the report said.
A separate report also published for consultation Tuesday seeks to tighten up international stablecoin rules, even though it says most industry players are already struggling to keep up with current norms dating back to 2020.
“Most existing stablecoin arrangements do not meet the FSB’s High-level Recommendations,” the report said, citing deficiencies across the board in areas such as governance, risk management, and regulatory disclosures.
Shutting the stablecoin door
Under new FSB plans, stablecoins that are usable in multiple jurisdictions could be forced to centralize governance, and wouldn’t be able to use automated algorithms to maintain value like the “flawed” terraUSD did.
“Authorities should require that GSC [global stablecoin] issuance be governed and operated by one or more identifiable and responsible legal entities or individuals,” the report said. “A GSC should not rely on arbitrage activities to maintain a stable value at all times and it should not derive its value from algorithms.”
That aims to address crucial errors in the design of terraUSD – which purported to maintain value being exchangeable with a companion token, luna. That crucially depends on having liquid trading, which is unlikely in cases where there is an abrupt collapse in confidence.
The FSB has no enforcement power, and will rely on peer pressure to avoid a scenario where crypto companies can pick and choose whichever jurisdiction offers the lightest regulatory load.
Consultations are open until mid-December, with the FSB aiming to finalize the recommendations by the middle of next year.