The global central bank cooperative body would bring stablecoins within the international standards for payment, clearing, and settlement systems.

On July 13, 2022, the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a joint report on the regulation of stablecoin arrangements titled “Application of the Principles for Financial Market Infrastructures to stablecoin arrangements” (the BIS Report). The BIS Report is the outcome of a consultation previously published in October 2021 (see this previous post for more information). It is intended for use by market participants as they design, develop, and operate their products and services that are (or have the potential to become) systemically important after launch; and by regulatory, supervisory, and oversight authorities as they assess and oversee stablecoin arrangements.

BIS Report reaches the conclusion, as proposed in the consultation, that stablecoin arrangements (defined as “an arrangement that combines a range of functions to provide an instrument that purports to be used as a means of payment and/or store of value), should observe the Principles for Financial Market Infrastructures (PFMI). The PFMI, as defined by BIS, are a set of 24 key international standards that the BIS issued for financial market infrastructures (i.e., payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories) to strengthen and preserve financial stability. The guidance in the BIS Report would generally implement a “same risk, same regulation” legal framework for stablecoin arrangements that are considered systemically important financial market infrastructures.

The BIS Report is structured around four of the 24 PFMI principles: governance, comprehensive risk management, settlement finality, and money settlements. Although not all of the PFMI principles are covered, systemically important stablecoin arrangements primarily used for making payments would be expected to observe all of the relevant PFMI principles. While dependent on a jurisdiction’s specific approach, in general, a payment system is considered systemically important if it has the potential to trigger or transmit systemic disruptions.

Following the four principles noted, a systemically important stablecoin arrangement should:

• Employ appropriate governance, including clear documentation and disclosures of ownership and management structures, control, lines of accountability, human intervention capabilities, operations, and affiliations
• Develop appropriate risk management and mitigation frameworks and tools to address material risks in an integrated and comprehensive way (e.g., legal, credit, liquidity, operational, and other risks) that it bears and poses to customers and affiliated entities (“institutional interdependencies”)
• Provide clear and final settlement (at a minimum by the end of the value date, regardless of the operational settlement method used), and manage risks arising from a misalignment between technical and legal finality
• Minimize and strictly control the credit and liquidity risk arising from the use of non-central bank money

The conclusions in the BIS Report are not binding, and countries have the option to implement the guidance through conforming laws, rules, and regulations, or structure their own approaches. Furthermore, the guidance does not apply to multicurrency stablecoins denominated in or pegged to a basket of fiat currencies, which are subject to further assessment. The CPMI and IOSCO stated that they will continue to “examine regulatory, supervisory and oversight issues associated with stablecoin arrangements and, as needed and appropriate, coordinate with other standard setting bodies to address outstanding standards gaps.”

Regulators Weigh In

Sir Jon Cunliffe (chair of the CPMI and deputy governor for financial stability at the Bank of England), and Ashley Alder (chair of IOSCO, CEO of Hong Kong’s Securities and Futures Commission, and future chair of the UK Financial Conduct Authority) commented in a joint op-ed that “it is important that the lessons are learnt and these standards are reflected in national legislation quickly, before stablecoins become systemic.”

Commissioner Caroline D. Pham of the US Commodity Futures Trading Commission commented positively on the BIS Report, noting that “in light of recent market events…the BIS Report…is a significant step to establish international standards for stablecoin arrangements and a cohesive regulatory framework that safeguards the global financial system.”

The Financial Stability Board (FSB) — a global regulatory body that includes IOSCO — applauded the BIS Report, noting that it is “a major step forward in applying ‘same activity, same risk, same regulation”’ to systemically important stablecoins that are used primarily for making payments.” On the horizon, the FSB plans to propose robust rules for digital assets in October 2022, due to their increasing interconnectedness with the traditional financial system. Stablecoins in particular must “be held to high regulatory and transparency standards, maintain at all times the reserves that preserve stability of value and meet relevant international standards.”

Legislators Set Their Sights on Stablecoins

Meanwhile, across the globe, legislators are moving quickly to get a handle on stablecoins by providing clearer channels of oversight and stricter operational guidelines:

• Japan: Legislation prepared by the Financial Services Agency (FSA) was passed on June 3, 2022, defining the legal status of stablecoins. The new law — which comes into effect in 2023 — defines stablecoins as digital currencies that must maintain a link with the yen or another legal tender, must be redeemable at face value, and must comply with registration requirements. Stablecoin issuers are limited to licensed banks, money transmitters, and trust companies; and stablecoin intermediaries or distributors are required to register and to take strict anti-money laundering and counter-financing of terrorism (AML/CFT) measures.
• Hong Kong: On January 12, 2022, the Hong Kong Monetary Authority (HKMA), Hong Kong’s principal regulator for banks and payment systems, published a discussion paper seeking the public’s views on its proposed approach to the regulation of stablecoins. The HKMA outlines its views on the development of stablecoins and proposes questions and its initial outlook for establishing an effective regulatory framework for stablecoin activities in Hong Kong.
• European Union: On June 30, 2022, the Markets in Crypto Assets (MiCA) bill was provisionally agreed upon by the European Commission, EU lawmakers, and EU member states. MiCA would impose strict operational and prudential rules on stablecoin issuers, such as safe and sufficient liquidity reserves.
• United Kingdom: On July 20, 2022, the Financial Services and Markets Bill was introduced to the lower house in parliament, and seeks to regulate certain types of digital settlement assets and stablecoins as a form of payment within the regulated perimeter of the UK payments system.
• United States: Key members of the House Financial Services Committee are negotiating bipartisan stablecoin legislation that reportedly includes a new licensing regime, one-to-one dollar reserve requirements, anti-money laundering requirements, and standards around custodial wallets.