Principles for Financial Market Infrastructures should be applied to stablecoins: BRI

The Committee for Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) of the Bank for International Settlements (BIS) released guidance on stablecoin regulation on July 13th.

The press release states that the guidance seeks to apply the “same risk, same regulation” legal approach to systemically important stablecoins used for payments.

The guidelines compare the transfer function of stablecoins to that performed by other financial market infrastructures (MFIs). Therefore, the Principles for Financial Market Infrastructure (PFMI) should be adhered to by stablecoins that can be transferred and are deemed essential to the financial system.

The PFMI refers to the international standards enacted for financial institutions. The scope of the PFMI is to improve the safety and efficiency of financial institutions, limit systemic risk and promote transparency and financial stability.

Which stablecoins should follow PFMI and how

The PFMI already provides guidelines for determining which MFIs are essential. For example, any FMI that has the potential to trigger systemic disruption is considered material. To identify important stablecoins, the BIS guidelines have defined other criteria.

This includes the size of the stablecoin, which can be determined using various data points, including the number of users and transactions, the value of transactions, and the value of stablecoins in circulation.

While assessing the importance of stablecoins, authorities should also consider the risk profile of the stablecoin, its connection to the traditional financial system, and whether or not it can be replaced by emergency services, according to the BIS report. .

The report, however, indicates that countries could choose whether or not they want to make compliance with the PFMI mandatory for stablecoins.

BIS guidelines have elaborated on governance, risk management, finality of settlement, and monetary regulations that stablecoins should follow. For example, the BIS report said there should be one or more clearly identifiable legal entities operated by a few people who can be held responsible and accountable. Additionally, stablecoin issuers should regularly monitor stablecoin risks and implement appropriate risk management frameworks to mitigate those risks.

The BIS report added that stablecoin issuers must minimize and strictly control the credit and liquidity risks of the stablecoin and ensure that the “stablecoin is an acceptable alternative to the use of central bank money.” .

A critical note is that the forecast does not cover stablecoins pegged to a basket of fiat currencies. The report added that the BIS would continue to study whether the current guidelines are sufficient for these multi-currency-backed stablecoins.

The guidelines added that stablecoins might have other “gaps” beyond the scope of the PFMI, such as consumer protection, data privacy, anti-money laundering and anti-terrorist financing.

Therefore, stablecoin regulation, oversight, and monitoring alone may not be sufficient to address these challenges and must be as the report states:

“complemented by other private or public sector efforts. These efforts could be such as improvements to existing payment infrastructure and exploration or development of central bank digital currency,”

Ongoing regulatory pressure on stablecoins

The regulation of stablecoins has become a priority for governments and international organizations since the collapse of the Terra ecosystem in May highlighted the potential risks posed by these assets.

Sir Jon Cunliffe, chairman of the CPMI and deputy governor for financial stability at the Bank of England, said that while the current market disruptions have caused widespread losses, the disruptions do not qualify as “systemic events”. However, this market turmoil underscores the rate at which market confidence erodes during these times and the intense volatility in cryptocurrencies, Cunliffe said. He warned:

“Events like these could become systemic in the future, especially given the strong growth in these markets and the growing ties between crypto-assets and traditional finance.”

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