Many stablecoins fall short of coming regulatory recommendations, says FSB chair

Financial Stability Board (FSB) chair Klaas Knot has outlined how the organization plans to address key threats to financial stability this year in a Feb. 20 letter sent to the G20’s finance ministers and central bank governors. Crypto assets and decentralized finance (DeFi) had a prominent place on the list of challenges the FSB saw. The G20 ministers and bankers group is meeting Feb. 24–25 in Bengaluru, India.

The FSB has an “ambitious work programme” for finalizing a crypto asset regulatory framework in 2023, Knot said. The FSB is an advisory body created by the G20 and affiliated with the Bank of International Settlements (BIS). It has no enforcement powers.

The FSB indicated in a Feb. 16 report that it was increasing its attention to DeFi in light of its potential connections with traditional finance. Now, Knot said the recommendations in the emerging framework may bode ill for some stablecoins:

“Importantly, the FSB’s work concludes that many existing stablecoins would not currently meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed BIS Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance.”

The guidance released by the BIS and International Organization of Securities Commissions in July extends the “same risk, same regulation” principles for financial market infrastructures to stablecoins. Those principles were released in 2012 in response to the 2008 financial crisis.

After the FSB publishes its final recommendations for regulatory and supervisory approaches to crypto assets and stablecoins in July, the board will make recommendations for specific standard-setting bodies and monitor their implementation.

Knot wrote, “The appropriate regulation of crypto-assets, based on the principle of ‘same activity, same risk, same regulation’ will provide the beginning of a strong basis for harnessing potential benefits associated with this form of financial innovation while containing its risks.”

The letter noted that one of the drivers of crypto asset growth was “dissatisfaction with the existing system of cross-border payments.” It added that the FSB will deliver a report on the next steps in the G20 roadmap on enhancing cross-border payments at the upcoming meeting.

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