A Future of Finance Webinar on January 26th 2023 at 2pm UK time
Over the last three years an international consensus has emerged on how to regulate a novel financial instrument first invented to put cash on to blockchain-based networks: the Stablecoin. Bringing certain types of Stablecoin within the scope of regulation does protect the status quo. But it could also precipitate a series of far-reaching developments in the banking, payments and tokenised securities markets.
What is the event about?
Regulators in Japan, the United States, the European Union (EU) and the United Kingdom have either brought Stablecoins within their regulatory perimeter already or indicated their intention to do so soon. The regulatory consensus is that regulated Stablecoins must be asset-backed and not algorithmic and that issuance will be restricted to regulated institutions such as banks.
In December 2022, the Basel Committee on Banking Supervision published the standard by which Stablecoins – among other digital assets – will be brought within the Basel framework that dictates how banks must allocate capital to their assets. The BIS paper makes plain that only Stablecoins issued by regulated entities backed by easily redeemable assets will attract favourable treatment.
In short, Stablecoins backed by short-dated money market assets denominated in fiat currency, and issued by regulated financial institutions such as banks, are coming within the regulatory perimeter. Which means that Stablecoins are about to become part of long-established rules and systems governing money creation, deposit insurance and access to central banks as lenders-of-last-resort.
In tandem, these policies add up to an approach that emasculates the ability of Stablecoins to disrupt the status quo by competing with banks for deposits and, by establishing themselves as an alternative means of saving and payment to fiat currencies, undermining the ability of national central banks to control domestic monetary conditions (asset backing is even being restricted to domestic assets).
This is the culmination of a regulatory backlash sparked by the 2019 announcement by Meta (then Facebook) that it planned to issue a global Stablecoin called Libra. Facebook then had 2½ billion users. If they adopted Libra en masse, it would strip banks of a large part of their funding from deposits, turn a non-bank into a global payment provider and put the conduct of monetary policy into commission.
So Libra was sunk, quite deliberately, by a lack of regulatory endorsement, led initially by the Financial Stability Board (FSB) at the behest of the Group of Twenty (G20) and latterly by the Group of Seven (G7), which set up a Working Group on Stablecoins. The policy measures now being enacted in Japan, the United States, the EU and the United Kingdom rest on that body of work.
Quite where this leaves non-bank Stablecoins, at least of the asset-backed variety, is not clear. The most successful non-bank Stablecoins, such as Tether and USDC, have secured money transmission licences in the United States and chosen to disclose details of their asset-backing. But the market capitalisations of Tether and USDC are both down since the summer of 2022.
True, this reflects wider difficulties in the cryptocurrency markets occasioned by the steady erosion of value in the cryptocurrency and DeFi markets since November 2021 and the sudden collapse of FTX in November 2022. Regulators may be hoping bank-issued CBDCs will make non-bank asset-backed CBDCs redundant. But this is improbable unless the cryptocurrency and DeFi markets disappear.
Stablecoins exist only because the cryptocurrency markets need a way to pay for assets on blockchain networks. They have proved indispensable to professional traders of cryptocurrencies, who use them to store profits without incurring the transaction costs of converting them into fiat currency through the banking system; to switch between blockchain networks; and to lend and borrow assets for profit.
Necessity, utility and profitability have clearly not persuaded regulators that non-bank Stablecoins are a safe innovation even in cryptocurrency markets. In April 2022, Gary Gensler, chairman of the Securities and Exchange Commission (SEC), warned they had become so important to crypto-currency trading that the loss of the currency peg or a failure of an issuer could have systemic consequences.
Whether those systemic consequences can be contained within the cryptocurrency markets remains to be seen. As recent experience proves, orderly redemptions of assets backing Stablecoins can be undermined by accelerating “runs,” or mass redemptions. As the money market fund crises of 2008 and 2020 prove, ultimately such “runs” can be halted only by central bank intervention.
For now, non-bank, asset-backed Stablecoins exist in a lightly regulated limbo. But algorithmic Stablecoins find themselves in an even worse place, regulatorily speaking. Despite the high-profile collapse of several algorithmic Stablecoins in 2021-22, in sequences that closely parallel conventional “runs” on banks, regulators have shown zero interest in endorsing them by regulation.
The implications of these regulatory decisions will reverberate through the banking and securities markets over the next three to five years. This webinar will assess the current status of regulatory initiatives in the major financial markets, and consider whether regulated Stablecoins will do more to preserve the existing dispensation or undermine it.
When is it being held?
Thursday 26 January 2023 at 14.00 London time
Where is it being held?
As a webinar on Zoom.
The regulation of Stablecoins may appear to lift a threat to the stability of the existing financial system. But it will also, by bringing a new means of payment on blockchain networks within the regulatory perimeter, open possibilities for lowering the cost of domestic and cross-border payments, and for tokenised asset markets to take off. Furthermore, regulated Stablecoins have the potential to disrupt existing forms of bank funding through deposits, with consequences for the creation of credit, and could even provide adequate substitutes for central bank digital currencies (CBDCs). Anyone involved in the banking, payments or securities industries will be affected.
What topics will be discussed?
- An international consensus has emerged on how to regulate Stablecoins. What is it missing?
- Can further regulatory steps be expected?
- Asset-backed Stablecoins compete with banks for deposits and HQLAs. Have regulators solved that problem with the current measures?
- Stablecoins can be used to create credit. Is this risk acute enough to warrant further regulatory measures?
- What impact will the BIS prudential standard on the capital treatment of crypto-assets have on Stablecoins?
- Do asset-backed Stablecoins suffer from a structural flaw akin to money market funds?
- What will happen to non-bank Stablecoins in a regulated future?
- Is it safe for regulators to ignore the potential risk of spillover from cryptocurrency markets into established financial markets?
- What have we learned from the disclosure of assets by non-bank Stablecoin issuers?
- Have rising interest rates improved the position of non-bank Stablecoin issuers?
- Is it wise for regulators to anathematise algorithmic Stablecoins?
- Are regulators interested in using Stablecoins to make cross-border payments cheaper, faster and more transparent?
- Would CBDCs exist if Stablecoins did not?
- Will regulated Stablecoins make CBDCs unnecessary?
Ricardo Correia, Senior Technology Executive, Digital Currencies at R3 https://www.linkedin.com/in/ricardo-m-correia/
Daniel Eidan, Advisor and Solution Architect at Bank for International Settlements, Innovation Hub https://www.linkedin.com/in/daniel-eidan/
Keith Bear, Fellow at the Centre for Alternative Finance, Judge Business School, University of Cambridge https://www.linkedin.com/in/keith-bear-2b7407/
Teana Baker-Taylor, VP Policy and Regulatory Strategy, UK/EU at Circle https://www.linkedin.com/in/teanabakertaylor/
For more information please contact Wendy Gallagher at firstname.lastname@example.org