At the Blockchain Association, we strongly believe that permissionless decentralized systems are essential to the creation of a more accessible, equitable, and efficient financial system. That’s why over the past weeks, our Stablecoin and DeFi Working Groups have been collaborating to respond to the Financial Stability Board’s (FSB) consultative document “addressing the regulatory, supervisory and oversight challenges raised by ‘global stablecoin’ arrangements.” As written, the FSB suggests that regulators consider prohibiting the use of permissionless decentralized systems. In our response, we (1) offer a broad defense of these systems, (2) suggest definitional changes to better address the risks potentially raised by unique stablecoin arrangements, and (3) argue for a principle-based, flexible, and tech-neutral regulatory approach to global stablecoin arrangements.
Why the FSB’s Recommendations Matter
The FSB is an international organization that coordinates “national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies.” After the global financial crisis in 2008, the G20 established the FSB to promote the stability of international financial markets, and its membership includes central banks and ministries of finance and treasury. While the FSB’s regulatory recommendations are not mandatory or enforceable, members tend to comply. For example, the United States has implemented nearly all of the FSB’s recommendations, and the U.S. Federal Reserve Vice Chair for Supervision Randal Quarles currently chairs the Board. Accordingly, the Report’s recommendations will influence national regulators’ approaches to stablecoins, perhaps especially so in the United States.
The Blockchain Association’s Recommended Changes to the FSB’s Stablecoin Report
The FSB Report addresses the financial regulatory, supervisory and oversight issues relating to privately-issued global stablecoins primarily used for retail purposes. In the Report, the FSB: (1) defines key terms, such as “global stablecoin arrangement;” (2) examines risks to financial stability global stablecoin arrangements may create; and (3) presents a series of recommendations for national regulators to mitigate the systemic risks potentially raised by global stablecoins. We have significant concerns with the Report’s treatment of permissionless decentralized stablecoin arrangements and systems more broadly. Below is an outline of our arguments in response to the Report:
The FSB should not recommend that regulators consider prohibiting the use of permissionless decentralized systems.
First, the FSB should not recommend that regulators consider prohibiting the use of permissionless decentralized systems. We believe that the establishment of global financial infrastructure based on permissionless decentralized systems would create a more accessible, equitable, and efficient financial system. Including this recommendation in the Report: (1) would unnecessarily stifle potentially transformative innovations based on permissionless decentralized systems that could expand access to financial services and improve the efficiency of the financial system; and (2) presupposes that permissionless decentralized systems cannot be safely regulated, which is inaccurate.
To better capture potential financial stability risks, the FSB should adjust and clarify its definition of “global stablecoin” and the characteristics that differentiate “global stablecoin arrangements” from other arrangements.
Second, to better capture potential financial stability risks, the FSB should adjust and clarify its definition of “global stablecoin” and the characteristics that differentiate “global stablecoin arrangements” from other arrangements. As the Report acknowledges, like the internet, the technologies underlying stablecoins and stablecoin arrangements are “not limited in… geographic scope,” so a term other than “global” may better define coins and arrangements that could pose financial stability risks. We recommend the terms “systemic stablecoin” and “systemic stablecoin arrangements,” which we believe more effectively capture potential financial stability risks. In addition, regulators and market participants have a well-developed familiarity with the term “systemic” in the context of financial regulation. Moreover, we believe that the FSB should consider additional factors to distinguish global stablecoin arrangements from others, including: (1) the distribution of stablecoins and availability of various stablecoin functions and services (such as issuance, re-selling, redemption, etc.) through or in connection with a non-financial technology company with a large existing customer base; and (2) the “bundling” of stablecoin functions and services with non-financial products with large existing customer bases.
The FSB should ensure that its regulatory recommendations are technology neutral and adhere to the “same business, same risks, same rules” principle.
Third, the FSB should ensure that its regulatory recommendations are technology neutral and adhere to the “same business, same risks, same rules” principle. The technological neutrality and “same business, same risks, same rules” principles should be implemented in practice, and therefore the Report should not mandate (or prohibit) the use of or give privilege to certain technologies.
The FSB should recommend a principle-based and tailored regulatory approach to stablecoin arrangements to address their unique characteristics, sizes, and complexities and to avoid creating a single compliant model.
Finally, the FSB should recommend a modular and tailored regulatory approach to stablecoin arrangements to address their unique characteristics, sizes, and complexities and to avoid creating a single compliant model. Stablecoin designs vary greatly, and many of the vulnerabilities and regulatory tools outlined in the Report are not applicable to all stablecoin arrangements. The FSB should recommend a regulatory approach that is modular and tailored in order to: (1) address the risks associated with various arrangements while not disproportionately harming innovation, and (2) avoid entrenching any particular stablecoin arrangement as the only model able to comply with the FSB’s recommendations. It should not be the regulator’s job to pick winners and losers of new industries but rather to set the framework to protect consumers and create a level playing field.
We appreciate that the FSB has given us the opportunity to respond to its consultative document. We believe that our recommendations would strengthen the Report and align with the FSB’s mission to strengthen financial systems and promote the stability of international financial markets. Our hope is that the FSB seriously considers these recommendations and does not unintentionally stymie innovation and progress towards a more accessible, equitable, and efficient financial system.