Stablecoins can pose risks to financial stability and need to be adequately regulated, according to the Group of 20.
The G20’s Financial Stability Board (FSB) issued a comprehensive stablecoin study on April 14, presenting 10 recommendations to regulate them effectively.
The regulators were spurred by the introduction of Facebook’s Libra, which would create an independent stablecoin based on a basket of currencies. Though Libra has since relented on this particular idea, worldwide governments continue to be vigilant over the project.
The FSB report notes that existing financial rules generally apply to stablecoins as well, mirroring similar statements from U.S. regulators. Nevertheless, the board maintains that the rules should be the same for all businesses that present financial risk, regardless of the technology used.
The global nature of stablecoins still presents gaps from patchy regulations between different countries. Some of the recommendations center on creating a flexible cross-border framework, so that stablecoins would not be able to play on the differences between each jurisdiction.
Beyond that, the FSB issued common recommendations such as strict Anti-Money Laundering and Counter-Terrorism Financing controls.
What’s the danger in stablecoins?
The hostility toward Libra can be explained by its enormous potential for instant adoption. The board also recognized existing stablecoins, including algorithmic coins like Dai (DAI), but concluded that they are currently too small to pose systemic risks.
The paper elaborates why stablecoins may eventually be a threat. Some of these concerns are largely related to their lack of adoption, as the researchers believe that even small deviations from their peg may have important financial implications in mainstream settings.
There were also significant concerns about their underlying infrastructure, believing that outages in payment — for example due to weak scalability — may be dangerous if an economy relied on these coins.
However, the most important issue appears to be that of capital controls:
“During periods of stress, households in some countries might come to regard [stablecoins] as a safe store of value over existing fiat currencies and exacerbate destabilizing capital flows. Volatile capital flows can have a destabilizing effect on exchange rates and on domestic bank funding and intermediation.”
Essentially, the board believes that one of the primary benefits of stablecoins — the ability to transact freely — is also a major financial stability threat.
This can be visualized in countries like Lebanon, which imposed strict capital controls in late 2019 and whose citizens are largely barred from their bank savings.
As one of the purposes of cryptocurrency is to empower people in situations like these, the fact that it is considered a threat to stability may result in important repercussions in the future.