The International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) have issued a consultative report on the application of the Principles for Financial Market Infrastructures (PFMI) to certain stablecoin arrangements (SAs) (the Report).
The Report was prepared in response to calls from the G7, the G20 and the Financial Stability Board for international standard-setting bodies to revise existing standards and principles or provide further guidance in respect of stablecoins and their role in enhancing cross border payments. This follows a flurry of work over the last couple of years by regulators and policy makers alike, predominantly triggered by Facebook's announcement of its plans to launch the Libra stablecoin (recently renamed Diem).
The Report proposes that "systemically important" SAs which perform a transfer function (i.e. for the transfer of coins between users) should comply with the relevant principles set out in the PFMI. The PFMI include guidance on governance, risk management and settlement arrangements.
In effect, this means that systemically important SAs will be subject to some of the same regulation as existing financial market infrastructure (FMI), such as central counterparties and securities settlement systems.
The Report suggests four overarching principles to take into account when assessing the systemic importance of an SA: size of the SA; nature and risk profile of the SA's activity; interconnectedness and interdependencies of the SA; and substitutability of the SA.
The purpose of the Report is to provide specific guidance on the application of the PFMI to systemically important SAs, taking into account the unique features of those arrangements compared to other FMI such as multiple interdependent functions and decentralisation. In particular, it includes guidance for systemically important SAs in respect of their governance arrangements (e.g. taking into account the fact that governance may be partially or fully decentralised), guidance on risks specific to SAs (such as the fact that they may perform a range of different, independent functions) and discussion of issues around settlement and potential misalignment between technical settlement and legal finality.
The Report also includes a list of nine questions in respect of which CPMI and IOSCO invite comments from the market by 1 December 2021.
In finding that systemically important SAs should be subject to similar regulation as FMI, CPMI and IOSCO seem to have adopted the "same risk, same regulation" policy that has been strongly encouraged and previously applied in the context of supervising non-bank payment firms in the UK and beyond. Indeed, the Report's findings are consistent with the increasing interest in regulating stablecoins being shown by financial regulatory agencies around the world – for example, the US is working towards a federal-level framework for stablecoin issuers and China's central bank has expressed concerns around the risks of private stablecoins affecting the stability of global financial systems.
As the digital landscape evolves and stablecoins continue to exert a growing influence on the financial system, other regulatory, supervisory and oversight issues are likely to be identified and addressed. It is therefore inevitable, as the Report itself suggests, that there will be further rules and guidance in this area. Overall, this is an exciting development and certainly one that we will be following closely with interest.
