Financial Watchdog Warns Many Existing Stablecoins Would Not Meet International Regulation Standards

The Financial Stability Board (FSB), the global watchdog that tracks and drafts recommendations about the global financial system, warned that many existing stablecoins would not meet the upcoming high-level international regulation standards that aim to strengthen stablecoin governance frameworks, redemption rights and stabilization mechanisms.

The FSB is set to roll out a new set of regulations for crypto and stablecoins in July 2023.

But, as early as February, FSB chair Klaas Knot already warned G20 finance ministers and central bank governors about many existing stablecoins not being able to meet the high-level recommendations included in the upcoming financial guidance.

"The FSB's work concludes that many existing stablecoins would not currently meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed BIS Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance," Knot said in a letter.

Stablecoins are cryptocurrency assets pegged to the value of other assets like the US dollar or Euro and became more popular when the so-called algorithmic stablecoin of the Terra blockchain crashed in May 2022.

The FSB chair also noted in the letter previous events in the crypto space, including the collapse of the crypto empire FTX, which according to the chairman, underlined the volatility and structural vulnerabilities of crypto assets and the need for regulatory oversight.

"We have now seen first-hand that the failure of a key intermediary in the crypto-asset ecosystem can quickly transmit risks to other parts of that ecosystem. And, if linkages to traditional finance grow, risks from crypto-asset markets could spill over onto the broader financial system," Knot said, highlighting the crucial role of regulatory oversight for the sector.

After the financial watchdog releases its final recommendations for supervisory and regulatory approaches to stablecoins and crypto assets sometime in July this year, the board will make recommendations for various standard-setting organizations and keep track of their implementation.

"The appropriate regulation of crypto-assets, based on the principle of 'same activity, same risk, same regulation' will provide the beginning of a strong basis for harnessing potential benefits associated with this form of financial innovation while containing its risks," Knot said.

In the U.S., several financial regulators like the Securities and Exchange Commission (SEC) and the New York Department of Financial Services (NYDFS) have started their crackdown on various stablecoins.

The New York regulator recently ordered Paxos, a stablecoin issuer, to stop creating more of its Binance-USD token. The company also received a Wells Notice from the SEC over the securities issue of its stablecoin.