On Monday, Klass Knot, chairman of the Financial Stability Board (FSB), an international body established by G20 that monitors and makes recommendations about the global financial system, commented on the upcoming standards for crypto and stablecoins regulation.
Knot issued a letter to G20 finance ministers and central bank governors suggesting that many existing stablecoins would not meet the “high-level” recommendations soon to be established by global institutions like the FSB.
The letter specified that the FSB’s upcoming regulation targets strengthening stablecoin governance frameworks, redemption rights, and stabilization mechanisms. The financial body also published its work plan for the year ahead on Monday.
According to the work plan for 2023, the FSB is set to finalize its recommendations for regulating crypto and stablecoins by July. In particular, stablecoins are cryptocurrencies pegged to the value of other assets like the U.S. Dollar, Euro, etc.
Regulators across the globe have been cautious of stablecoins in recent times. They have been taking several steps to regulate payment-focused stablecoins, most of which are backed by fiat currency reserves in cash equivalents- or, more infamously, by short-term unsecured debt.
While stablecoins issuers have tried to cut private debt out of their reserves and improve transparency, Knot’s message indicates that these measures might not have been enough.
In the letter, the FSB chair added that many existing stablecoins wouldn’t meet the international norms established by payments or securities standard setters either. In February last year, the financial regulator warned that risks from cryptocurrencies to financial stability “could rapidly escalate.”
After the collapses last year, including the collapse of token issuer Terra and crypto exchange FTX, regulators worldwide, including the FSB, have been more cautious about regulating the sector.
In its annual report published in November, the organization highlighted the need for global standards of crypto regulation. It said many vulnerabilities in the sector are similar to those in the traditional financial market and must be regulated similarly. Steven Maijoor, chairperson of the FSB’s department dedicated to crypto assets, also drew similarities between the crypto asset markets and the downfall of the Bank of Amsterdam around three centuries ago.
Last week, the FSB said it would work with other standard-setting bodies to determine how decentralized finance (DeFi) should be regulated. The regulator suggested that the rise of stablecoins, such as asset-backed stablecoins like Tether and algorithmic stablecoins like Dai, would likely increase the adoption of DeFi solutions by retail and corporate users. It also emphasized the need to understand the peculiarities of different stablecoins to monitor their risks to the crypto industry, including the DeFi ecosystem.