Application of the Principles for Financial Market Infrastructures to stablecoin arrangements
The Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) publish their guidance on the application of the Principles for financial market infrastructures (PFMI) to systemically important stablecoin arrangements (SAs), including the entities integral to such arrangements.
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.
The guidance highlights that the transfer function of an SA is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI.
SAs may present some notable and novel features as compared with existing FMIs. These notable features relate to: (i) the potential use of settlement assets that are neither central bank money nor commercial bank money and carry additional financial risk; (ii) the interdependencies between multiple SA functions; (iii) the degree of decentralisation of operations and/or governance; and (iv) a potentially large-scale deployment of emerging technologies such as distributed ledger technology.
Given these features of SAs, the guidance elaborates aspects related to: (i) governance; (ii) framework for the comprehensive management of risks; (iii) settlement finality; and (iv) money settlements. The guidance also provides considerations to assist authorities in determining whether a stablecoin arrangement is systemically important.
This guidance is a major step forward in applying "same risk, same regulation" to systemically important SAs that are used for payments. It is also a key contribution to the G20 cross-border payments programme and supports the work of the Financial Stability Board in this area.
Recent developments in the crypto market have again brought urgency for authorities to address the potential risks posed by cryptos, including stablecoins more broadly. It should be noted that stablecoins may have shortcomings in the aspects that are beyond the scope of the PFMI (eg competition, consumer protection, data privacy and anti-money laundering/combating the financing of terrorism). Further, stablecoins, interacting with cryptos and Defi, could lead to a fragmented and fragile monetary system. The 2022 BIS Annual Economic Report Chapter 3 "The Future Monetary System" outlines the challenges, structural limitations and misaligned incentives inherent in such markets.
In order to address these broader challenges in a holistic manner, the regulation, supervision and oversight of stablecoin arrangements alone may not be sufficient and will need to be complemented by other private or public sector efforts such as improvements in existing payment infrastructures and exploration or development of central bank digital currency.
There is also a need for global cooperation between central banks, other relevant authorities and a wide range of stakeholders. It will be for individual jurisdictions to develop laws, regulations and rules to give effect to these principles. What is important is that, with international standards in place, regulators must have robust rules against which to judge how they are being met (see the op-ed by the Chairs of the CPMI and IOSCO Board).
The CPMI and IOSCO will continue to examine regulatory, supervisory and oversight issues associated with stablecoin arrangements and coordinate with other standard-setting bodies.