Stablecoins have attracted much regulatory attention lately. The G7 working group on stablecoins, the International Organization of Securities Commissions, the Financial Stability Board (FSB) and the European Commission are among the international institutions pressing for global stablecoins regulation. The overarching regulatory problems they all identify are:
- The lack of legal certainty around stablecoins’ treatment, making it unclear whether they fit into the existing regulatory frameworks; and
- The oversight and public policy challenges they could pose if widely adopted, predominantly as regards monetary policy and financial stability.
In this context, the G20 tasked the Financial Action Task Force (FATF), an intergovernmental organization responsible for developing international standards to combat money laundering and terrorist financing (ML/TF), to prepare a report on ML/TF issues concerning stablecoins. The report mainly focuses on:
The definition of stablecoins: The FATF uses the FSB’s stablecoins’ definition. For the FSB, stablecoins are a type of crypto-assets that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets. What is more, the FATF makes a distinction between stablecoins not widely adopted and global stablecoins backed by large companies, which have the potential to become mainstream.
The ML/TF risks of stablecoins: The FATF identifies anonymity, global reach and layering (i.e. the ability of quickly exchanging between different virtual assets allows the multiple layering of illicit funds within a short timeframe) as being particular ML/TF vulnerabilities for stablecoins. The degree to which these risks materialize depends on: the features of respective stablecoin arrangements, the extent to which jurisdictions have implemented ML/TF mitigating measures, and the mass adoption of the stablecoin.
The application of the revised ML/TF FATF Standards: The FATF clarifies that its revised Standards apply to stablecoins. In fact, depending on their structure, stablecoins will be covered under the revised FATF Standards either as a traditional financial asset (i.e. as a security) or as a virtual asset (i.e. as a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes). In other words, any entities within the stablecoin system will have ML/TF obligations under the revised FATF Standards if they meet the definition of either a financial institution or a virtual asset service provider. As for next steps, the FATF will provide guidance on stablecoins, as part of a broader update of its Guidance on virtual assets. The guidance will set out in more detail how ML/TF controls apply to stablecoins, including the tools available to jurisdictions to address the associated ML/TF risks.
It is important to read the FATF report in conjunction with the European Union’s new AML Action Plan, which, among other things, envisages a stronger role for the EU in setting such international standards and the regulatory push for an EU-wide crypto legislation.