According to a report released by the Financial Stability Board today, many stablecoins “do not have credible methods to guarantee their promise of price stability” and none of them presently match the parameters set for the digital asset category by central bankers of the world’s largest economies.
The board also questioned how “stable” stablecoins really are.
The financial research and policy organization, which is run by regulators and senior central bankers from several major economies, does not set binding rules. However, a set of high level recommendations on crypto assets and warnings on stablecoins and other digital currencies will be relevant to policymakers & financial institutions around the world.
Tuesday the organisation release 2 reports. One is focused on high-level suggestions for crypto assets, which the regulatory body wants to approve after receiving feedback from the general public next year. The other is an evaluation of stablecoin issuers’ ability to generally meet the “High-Standard” criteria established by the group in 2020.
The FSB discovered that most users must sell stablecoins on exchanges in order to liquidate them, and the price could fall below the value of the currency to which the coin is pegged. The FSB cited limits on redemptions, including the potential to delay or deny them.
The FSB also questioned how most stablecoins could maintain their prices under market stress, concluding that “most stablecoins allow arbitrage activities of market participants and to considerable extent rely on them”, and that it is not clear how these would be hold-up under adverse financial conditions, “raising doubts about the effectiveness of stabilization mechanisms to support stable prices at all times.”
The study of stablecoins comes at a time when the European Central Bank, the U.S. Federal Reserve, and other central banks are debating whether or not to launch their own digital currencies. Additionally, the collapse of the algorithmic stablecoin Terra, which the Financial Stability Board cites as an example of “the inherent difficulty of designing a robust stabilisation mechanism based on an algorithm & arbitrage strategy involving assets with no inherent value.
The board recommends applying similar rules to stablecoins that banks are currently required to follow, an approach also discussed by the US Congress. A report on crypto asset regulations, shorter than the stablecoin findings, also mandates a “same activity, same risk, same regulation” approach to digital assets, also similar to the US regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The FSB will accept comments on its proposed regulations for crypto assets through December 15 and intends to publish full final proposals in the middle of 2023.