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FSB releases recommendations to regulate ‘global stablecoins’ such as Libra

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The G20’s financial watchdog, the Financial Stability Board (FSB), has published regulatory recommendations opposing the trans-national ambitions of “global stablecoins,” such as Facebook’s Libra project.

The FSB’s report offers regulatory recommendations to G20 member states and the broader international community intended to prevent stablecoin projects from using opportunities for “regulatory arbitrage” and becoming embedded within the financial structures of national economies.

The report warns that so-called global stablecoins (GSC) could become “systemically important” across jurisdictions, undermining the capacity for governments to dictate monetary and investment policy within their borders.

“The decentralized nature of GSC arrangements could pose governance challenges; stabilization mechanisms and redemption arrangements could pose market, liquidity, and credit risks.”

The report also notes risks relating to the technology underpinning stablecoins, warning that “the infrastructure and technology used for recording transactions, and accessing, transferring and exchanging coins could pose operational and cyber-security risks.” 

Unique challenges relating to the collection and storage of data relating to GSC transactions were also identified.

The FSB emphasizes that the challenges stable tokens pose to the financial governance of nation-states are currently limited by their relatively small adoption. It urges lawmakers to establish comprehensive regulatory frameworks before GSCs gain significant traction:

“Ensuring appropriate regulation, supervision, and oversight within jurisdictions and internationally will therefore be important to prevent any potential gaps and avoid regulatory arbitrage.” 

The FSB also recommends collaboration between national supervisory authorities to identify “potential gaps in their domestic frameworks” and “reduce opportunities for cross-sectoral and cross-border regulatory arbitrage.”

However, despite warning that a lack of international cooperation will open the door to regulatory arbitrage, a survey of 51 jurisdictions found disparate oversight regimes across various nations, including more than one dozen different legal classifications for stablecoins.

Legal classifications for stablecoins across 40 jurisdictions: FSB

The FSB added it will frequently review its recommendations to keep pace with the evolving GSC sector.

Despite emphasizing the risks associated with stablecoins, the report also notes significant benefits offered by stablecoins, including efficiency savings in the provision of financial services and payments, and greater economic inclusion internationally.



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Regulation

New York authorizes first Yen stablecoin operator in the US

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New York has given the first authorization to a stablecoin backed by the Japanese Yen to operate in the U.S.

Per a Dec. 29 announcement, the New York Department of Financial Services has granted Japanese firm GMO-Z.com a charter to handle U.S.D. and Yen-backed stablecoins in New York. 

Given New York’s status as a global center, the NYDFS is the most prominent state financial regulator in the U.S. It is also one of the most aggressive. A pass to operate in New York often opens up the rest of the country. 

GMO’s charter is as a limited liability trust company rather than a full bank, the principle difference being in authorization to handle deposits. While a stablecoin operator typically needs the ability to hold reserves of the pegged asset, GMO’s charter limits its rights to hold other kinds of deposits not central to its ability “to issue, administer, and redeem” its stablecoins. 

The right to issue such non-depository charters has been a bone of contention between state regulators like the NYDFS and national banking regulators in the U.S. 

GMO president and CEO Ken Nakamura said: “We’re breaking ground with our move to issue the first regulated JPY-pegged stablecoin, which many see as a safe haven asset.” 

The NYDFS recently made changes to its famous BitLicense, including a conditional format that buddies up newly licensed firms with existing licensees. The first conditional BitLicense went to PayPal, facilitating the launch of its new crypto services earlier this fall with the help of longstanding licensee Paxos.