G20 regulator flags instability in stablecoins

None of the existing stablecoins meet the standards set for digital assets by the central banks of the world’s largest economies. This conclusion was reached by the Financial Stability Board (FSB) under the G20.

In 2020, the organisation issued recommendations for regulating ‘stablecoins’. In the new report, the FSB conducted a market review and proposed policy changes for discussion.

The Council noted the instability of such coins. Algorithmic stablecoins like the collapsed UST from Terra do not have a reliable price-stabilisation mechanism.

The example of USDT from Tether demonstrated that even reserve-backed coins in a market frenzy are unable to maintain the peg. This type of stablecoin also suffers from collateral quality and opacity, the FSB specialists noted.

In their view, ‘stablecoins’ lack an accessible direct redemption mechanism at a fixed price. Most users are forced to sell assets on exchanges, often facing price declines. Issuers allow direct redemption for a small circle of investors, establishing qualification and other barriers.

The FSB recommended applying in the regulation of stablecoins the rules that apply to the banking sector.

«FSB’s recommendations envisage that authorities should rely on existing sector standards and principles in cases where stablecoin mechanisms perform the same economic function and create similar risks as existing regulated activities», the report states.

The organisation is inviting comments from interested parties on its proposals until 15 December 2022.

Earlier in 2021, the FSB assessed the implementation of its recommendations for regulating ‘stablecoins’ as being at an early stage.

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