- The Financial Stability Board is set to release international standards for regulating stablecoins.
- FSB Chair Klaas Knot has warned that many existing stablecoins may not meet the high-level recommendations.
- The FSB also plans to work with other standard-setting bodies to determine how decentralized finance (DeFi) should be regulated.
The Financial Stability Board (FSB) is expected to release new regulations for crypto and stablecoins in July 2023. However, the FSB’s Chair, Klaas Knot, has already sounded warning bells in a letter to G20 finance ministers and central bank governors. Knot cautioned that many existing stablecoins might not meet the “high-level” recommendations outlined in the upcoming guidance.
FSB Offers Guidance on Governance and Stability
The FSB’s upcoming guidance will focus on strengthening stablecoin governance frameworks, redemption rights, and stabilization mechanisms. Stablecoins are cryptocurrencies pegged to the value of other assets, such as the U.S. dollar or the euro. However, many stablecoins are backed by fiat currency reserves in the form of cash equivalents or, more notoriously, by unsecured short-term debt.
The FSB previously warned of the risks that crypto poses to financial stability. Regulators worldwide have been increasing their sector oversight following the collapse of several companies. To mitigate risk, the FSB will also present guidance measures to help prevent it from happening again.
Meeting International Regulations of Stablecoin Transparency
The FSB is also planning to work with other standard-setting bodies to determine how decentralized finance (DeFi) should be regulated and is set to publish a paper on regulatory issues associated with crypto in collaboration with the International Monetary Fund (IMF). The FBS hopes that the paper will help guide stablecoin transparency.
While stablecoin issuers have been trying to increase transparency and reduce private debt in their reserves, Knot’s message suggests these measures may not be enough. Furthermore, Knot adds that many existing stablecoins would not meet the international norms set by payments or securities standard setters.
Knot states that It is essential for the stablecoin industry to recognize the importance of meeting international regulatory standards. With the FSB’s recommendations forthcoming, stablecoin issuers must prioritize strengthening governance frameworks, redemption rights, and stabilization mechanisms.
On the Flipside
- Some stablecoin issuers have tried to improve transparency and cut private debt out of their reserves, but it is unclear whether these measures will satisfy the FSB’s upcoming recommendations.
- The FSB plans to address regulatory issues in decentralized finance, but it is currently unclear how this will be accomplished.
Why You Should Care
The upcoming recommendations from the FSB will provide international standards for regulating stablecoins. As stated by Knot, many existing stablecoins may not meet these high-level recommendations. This means that the stablecoin industry must prioritize compliance with international regulatory standards to promote transparency and accountability while mitigating potential risks to financial stability.
The concerns about the direction of regulation in the U.S. is covered in:
Coinbase CEO Brian Armstrong Says SEC’s Ban on Crypto Staking “Would Be a Terrible Path for the U.S.”
Binance’s BUSD is the most recent stablecoin making waves. Read about why here:
Paxos-BUSD Dispute Triggers Large-Scale Withdrawals from Binance