Financial Stability Board warns of risks associated with global stablecoins
The Financial Stability Board (FSB) today posted a report outlining high-level recommendations for the regulation, supervision and oversight of “global stablecoin” (GSC) arrangements.
The report notes the risks and vulnerabilities raised by global stablecoins, although the authors agree that financial stability risks from existing stablecoins are presently limited. This is largely due to the relatively small scale of these arrangements and their current limited use cases, mainly around facilitating trading in other crypto assets. However, the use of stablecoins as a means of payment or a store of value might significantly increase in the future, possibly on a large scale and across multiple jurisdictions. In addition, the different activities within a stablecoin arrangement, in particular those related to managing the reserve assets, may considerably increase linkages to the existing financial system.
GSCs could pose financial stability risks through certain key channels. If a GSC were widely-used as a common store of value, even a moderate variation in its value might cause significant fluctuations in users’ wealth. Such wealth effects may be sizeable enough to affect spending decisions and economic activity.
If users relied upon a stablecoin to make regular payments, significant operational disruptions could quickly affect real economic activity, e.g. by blocking remittances and other payments. Large-scale flows of funds into or out of the GSC could test the ability of the supporting infrastructure to handle high transaction volumes and the financing conditions of the wider financial system.
Further, disruption to payments may cause further decline in confidence, which in turn could prompt further redemptions and decline in the GSC’s value, compounding wealth effects. The significance of these channels and their impact on financial stability depend on how widely and for what purpose a GSC is used, and whether linkages to the financial system increase.
Macrofinancial risks may arise particularly if, over time, households and businesses in some economies come to hold substantial portions of their wealth in GSCs, rather than in local currencies. During periods of stress, households in some countries might come to regard GSCs as a safe store of value over existing fiat currencies and exacerbate destabilising capital flows. Volatile capital flows can have a destabilising effect on exchange rates and on domestic bank funding and intermediation.
Regarding vulnerabilities, a scenario analysis conducted by the FSB identifies three main types of them.
- Market, liquidity and credit risks
The choice and management of the GSC reserve assets, particularly the degree to which they could be liquidated at or close to prevailing market prices, are key in this respect. Otherwise, large-scale GSC redemptions might result in “fire sales” of reserve assets that could reduce the “stable” value of the GSC relative to the reserve assets absent secondary guarantees. Such loss of value could impair user confidence in the resilience of the GSC arrangement as a payment mechanism, the financial institutions and the markets in which such assets were invested.
- Operational risk (including cyber risks) and risk of loss of data
A second type of vulnerability concerns potential fragilities in the governance, operation and design of the GSC arrangement’s infrastructure, including its ledger and the manner of validating users’ ownership and transfer of coins. This vulnerability could crystallise for example due to an operational incident at a custodian or a compromised ledger resulting from a design defect, a cyber incident, or a failure of validator nodes. A lack of network capacity to validate – and subsequent delays in processing – large volumes of transactions might amplify users’ loss of confidence, and trigger further redemption requests.
In the event of a disruption in the GSC arrangement, ambiguity about rights and protection afforded to users could amplify confidence effects. In particular, if users do not have redemption rights or a direct claim on the underlying assets, confidence could be undermined. The degree of vulnerability would be impacted by the effectiveness of the GSC arrangement’s governance and controls. The clarity of the roles and responsibilities of the GSC arrangement’s governance body – including in respect of setting and enforcing the rules on establishing the GSC’s value and on the functioning of the infrastructure – could affect users’ confidence.
- Vulnerabilities arising from applications and components within the GSC arrangement
This vulnerability relates to the applications and components on which users rely to store private keys and exchange coins. Such vulnerabilities could crystallise due to an operational incident at a wallet or exchange, for instance. The scope of affected users might depend on the market share of the associated provider, and the degree to which it, for example, serves users in different jurisdictions.
The degree of vulnerability of a GSC to shocks also depends on the operational resilience arrangements for wallets and exchanges, including stand-in and fall-back arrangements that ensure continuity of service to users, and on the continued liquidity of the secondary market for coins.