Capital and financial markets regulators around the world continue to grapple with the disruptive effect of crypto currency, and how to best adapt regulatory imperatives to innovative developments.
This month, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published preliminary guidance [PDF] (the “Preliminary Guidance”) on the application of the Principles for Market Infrastructures [PDF] (PFMI) to systemically important stablecoin arrangements and the entities behind them.
PFMI was published in 2012 and contains rules for payment, clearing and settlement systems. PFMI is intended to ensure that the infrastructure supporting global financial markets is robust and well-placed to withstand financial shocks.
Stablecoins are crypto assets pegged to the value of a reserve asset, typically the U.S. Dollar. Stablecoins count among the most frequently traded crypto assets because they offer price stability and facilitate trading in other crypto assets. Stablecoins have attracted considerable interest from international organizations, including the G7, the G20 and the Financial Stability Board. These coins are considered to have the potential to become systemically impactful on the global financial system.
The Preliminary Guidance builds on guidance issued by CPMI and IOSCO in March 2020 [PDF] in which it was concluded that PFMI applies to systemically important stablecoins because the ability to transfer stablecoins between users is akin to the transfer functions performed by other financial market infrastructure. The Preliminary Guidance details the particular application of the PFMI principles to systemically important stablecoins and recommends that stablecoins operators should have, among other things:
- Appropriate governance arrangements, including clear and direct lines of responsibility and ultimate control of the stablecoin by natural persons.
- Comprehensive risk management, including regular review of the material risks that the stablecoin’s transfer function bears from and poses to other functions of the stablecoin and related entities (e.g. settlement banks or liquidity providers).
- Settlement finality, including clear definitions of when the stablecoin’s ledger becomes irrevocable and when the technical settlement occurs. Stablecoins should also make transparent whether and to what extent there could be misalignment between technical settlement and legal finality and what the mechanism is for reconciling such a misalignment when it occurs.
- Risk, the preliminary guidelines are that stablecoins should have little or no liquidity risk or credit risk. The preliminary guidelines consider this to, in turn, require consideration of factors such as the nature of the stablecoin owners title to the reserve assets, the nature and sufficiency of the reserve assets, and the treatment of the reserve assets in the event of insolvency of the stablecoin issuer or the custodian of the reserve assets.
The Preliminary Guidance is likely to influence the development of a Canadian regulatory framework for stablecoins. The Bank of Canada is a member of the CPMI and the securities regulatory authorities in Alberta, British Columbia, Ontario and Quebec are members of IOSCO.
CPMI and IOSCO are inviting comments on the Preliminary Guidance and ask that responses be submitted before December 1, 2021.