(Kitco News) - The Financial Stability Board (FSB), which is comprised of a group of central bankers and financial regulators from across the G20 countries, has released a new report highlighting the dangers of stablecoins and casting doubt on just how “stable” some of these offerings are.
“Most existing stablecoin issuers promise (implicitly or explicitly) to maintain a stable value, typically relative to a single fiat currency. However, many of these existing stablecoins are issued by unregistered and unlicensed entities and do not have credible mechanisms to support their promise of price stability,” the report said.
According to the FSB, no stablecoin currently meets the standards set for the digital asset category by central bankers of the world’s largest economies.
As part of its assessment, the FSB provided a set of high-level recommendations around crypto assets along with warnings about the threats posed by stablecoins and other digital currencies.
The FSB found that the majority of users had to utilize exchanges to liquidate their stablecoins, which often led to a drop in price below the value of the currency that the coin is pegged to. The organization also highlighted concerns around the ability of most stablecoins to maintain their price under market stress.
“Most stablecoins enable arbitrage activities of market participants and to a considerable extent rely on them to maintain the stablecoin’s value against the reference asset,” which the FSB said raised “questions about the effectiveness of the stabilization mechanisms in supporting a stable price at all times.”
The board ultimately recommended that stablecoins be subject to the same rules that banks currently follow, similar to what has been discussed by the U.S. Congress – the adoption of a “same activity, same risk, same regulation,” approach to digital assets.
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U.S. banking regulator echoes stablecoin concerns
As the FSB was revealing its new reports, across the pond a senior U.S. banking regulator was also raising concerns about stablecoins, cautioning that they function much like banking but lack the same rule structure as the traditional banking sector.
“They want to borrow ideas out of bank deposits and this idea that you’ve got something that functions just like money, but on the internet,” said Acting Comptroller of the Currency Michael Hsu at Georgetown Law’s D.C. Fintech Week.
“This concept is useful as shorthand,” Hsu stated, but cautioned that “now we’re moving into the world of disguise, and that’s where I get worried.”
Hsu’s main concerns surrounding stablecoins centered on their “safety, soundness, and fairness,” but the regulator also signaled that he didn’t want to stifle development with overly restrictive regulations.
“There’s a materiality threshold which I think provides plenty of space for the experimentation that folks want to do,” Hsu said, implying that his agency would only get involved if a project started to violate the safety, soundness and fairness measures he raised as his focus.
