On April 14, the Financial Stability Board (FSB) addressed in a consultative document the challenges spurred by the emergence of stablecoins in the global financial market.

According to the document, stablecoins, like other cryptocurrencies, “enhance the efficiency of the provision of financial services.”

However, they also present risks to financial stability if they are adopted on a significant scale.

Among their recommendations is empowering local authorities to prohibit specific stablecoins in their jurisdictions.

Widespread adoption of stablecoins: boon or bane?

Chief among their concerns is the widespread adoption of stablecoins. If it happens, it could potentially give rise to an independent payment infrastructure.

According to them, regulatory issues could surface from the widespread adoption of global stablecoins, especially if they are decentralized.

In some newly emerging market economies, the document revealed that there is a greater concern about foreign-currency pegged stablecoins potentially replacing fiat currencies, retail deposits, or safe assets. Among them, there is a fear that the situation could “exacerbate bank runs.”

FSB: empower local authorities

The recommendation of the FSB is to empower local authorities to regulate, control, and prohibit the use of global stablecoins, including the power to prohibit “fully decentralized systems.”

The FSB defines a global stablecoin as one that has the “potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume.”

Examples of these stablecoins are Tether (USDT) and TrueUSD (TUSD) — both backed by the U.S. dollar.

Ten recommendations on stablecoins

FSB recommends that in regulating global stablecoins, they:

should be comprehensively regulated and supervised; should be regulated functionally and proportionally to their risks; should be regulated and supervised by a cross-border and cross-sectoral jurisdiction in that supports each oversight; have governance frameworks that are comprehensive and identify accountability; have an effective risk management framework in place; have robust systems for safeguarding, managing, and storing data; have appropriate recovery and resolution plans; provide transparent information about functions including any stabilization mechanism; provide legal clarity on the enforceability of redemption rights; and meet all regulatory, supervisory, and oversight requirements of any jurisdiction before operating.

How could it potentially affect the crypto market?

This will mean that cryptocurrency firms could potentially fall under the same regulatory ambit governing banks and other financial service providers.

The expectation as of yet is that central banks will begin heightening cooperation efforts with other central banks to strengthen supervisory efforts over stablecoin issuers and dealers.

Richy Qiao, a chief business officer of Ampleforth, said that the move is expected, adding:

“Large stablecoins that are centralized or tied to the financial system only work, until they matter. The FSB’s recommendations are inevitable and could result in the future of the entire crypto ecosystem coming under the control of those who control these types of regulated fiat-backed assets.”

If FSB recommendations are adopted, this could also result in a decrease in liquidity for cryptocurrencies. The promise of a permission-less and frictionless system that seems to be among its most unique features is in danger as well.

Blockchain projects that are heavily reliant on stablecoins such as the MakerDAO and Compound, as well as other decentralized finance (DeFi) projects, could suffer tremendously.

The adoption of FSB’s recommendations could put the cryptocurrency industry in a precarious position.

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