IOSCO – BIS Publishes Guidance on Stablecoins

IOSCO or the International Organization of Securities Commissions and the Bank for International Settlements (BIS) – Committee on Payments and Market Infrastructures (CPMI) have published final guidance on stablecoins. The guidance follows a proposal for consultation in 2021.

The publication is called a “major step forward” in defining regulation with stablecoins, digital assets that are typically backed by fiat currency but have largely fallen under fragmented regulations around the world. Some stablecoins have aspired to be managed algorithmically but have failed in their attempts. Recently, TerraUSD, an algo stablecoin collapsed as its dollar peg was lost and holders lost most of their money.

Sir Jon Cunliffe, Chair of the CPMI and Deputy Governor for Financial Stability at the Bank of England, issued the following statement:

“Recent developments in the cryptoasset market have again brought urgency for authorities to address the potential risks posed by cryptoassets, including stablecoins more broadly. The recent market disruptions, while costly for many, were not systemic events. But they underline the speed with which confidence can be eroded and how volatile cryptoassets can be. Such events could become systemic in the future, especially given the strong growth in these markets and the increasing linkages between cryptoassets and with traditional finance.”

Ashley Alder, Chair of the IOSCO Board and Chief Executive Officer of the Hong Kong Securities and Futures Commission, stated:

“Our risk management, governance and transparency standards for existing financial market infrastructures are stringent. We expect the same level of robustness and strength in these aspects in systemically important stablecoin arrangements.”

The two agencies explain that the most frequent use cases of stablecoins include acting as a bridge between traditional fiat currencies and digital assets; serving as collateral in cryptoasset derivative transactions; and facilitating trading, lending or borrowing and acting as collateral in decentralized finance (DeFi).

Stablecoin can be used to settle payments and this role could evolve further in the future.

The document provides “principles for financial market infrastructures (PFMI) to stablecoin arrangements (SAs). The document is said not to intend to create additional standards for SAs but rather to provide more clarity to systemically important SAs and relevant authorities as those SAs seek to observe the PFMI.

The report does not cover issues specific to stablecoins denominated in or pegged to a basket of fiat currencies (multicurrency SAs), which will be covered in the future.

CFTC Commissioner Caroline D. Pham distributed a statement on the efforts to set standards for the regulation of stablecoins:

“Technological change has continued to transform markets, with the rise of digital assets and innovations such as stablecoin arrangements to provide transfer functions.  Today, the Bank of International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued the report Application of the Principles for Financial Market Infrastructures to stablecoin arrangements.

More than a decade has passed since CPMI-IOSCO first published the Principles for Financial Market Infrastructures (PFMls) in the wake of the 2008 financial crisis. Since then, national authorities around the world, including the CFTC, have implemented the PFMls to ensure that there is a strong and consistent approach for the oversight of FMIs in order to mitigate systemic risk.

Especially in light of recent market events, I want to recognize the timely and important work of the CPMI and IOSCO in addressing how the PFMls may apply to systemically important stablecoin arrangements.  This report is a significant step to establish international standards for stablecoin arrangements and a cohesive regulatory framework that safeguards the global financial system.

I am pleased to see the CFTC’s continued international leadership, including as co-chair of the CPMI-lOSCO Policy Standing Group, and would like to recognize in particular CFTC staff Kristen V. K. Robbins, Bob Wasserman, Matt Jones, and Jason Mahoney.  I look forward to hearing from both the public and private sectors on the implications of this report and recommendations for further action.”

The document is not a prescriptive regime but guidance for stablecoins to be regulated as such to not create any credit nor liquidity risk.

The guidance is available here.

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