For the last two years, we have been steadily chronicling the expanding regulatory perimeter across different segments of the FinTech sector. For the last eight weeks, policymaking in this (and other) areas effectively halted amid a broad-based effort to fight the consequences of the global pandemic.
But as we noted to our COVID19 Report subscribers periodically over the last few weeks, reliance on, and official sector interest in, digital payments has increased during the pandemic period. In fact, the pandemic has accelerated public policy moves regarding digital payments. Our PolicyScope platform has made it easy to spot the steady increase in digital currency policymaking in the last few weeks.
So few of us were surprised to see today's Financial Stability Board (FSB) proposal seeking to expand the regulatory perimeter in very specific ways to cover stablecoin issuers.
The Path Towards Today's Proposal
The 2019 Libra and Stablecoin Dramas
Regular readers of our blog and cryptocurrency experts will remember 2019 as the year that forced policymakers to take digital tokens seriously. The PolicyScope timeseries illustrating the policy dynamic during this period appears on the left. The main developments included:
In the first quarter, JPMorgan launched a stablecoin to facilitate instant payments among its customers. The coin would be pegged 1:1 to the U.S. dollar.
In the second quarter, a consortium of companies assembled by Facebook proposed a global stablecoin whose value would be determined in relation to a basket of currencies. We analyzed the proposal HERE and HERE.
In the third quarter, global policymakers responded during the IMF/World Bank Ann Meetings, in what we jokingly referred to as "the Empire Strikes Back." Among other things, the Group of Twenty (G20) finance ministers and central bank governors requested that the FSB report back to them and make recommendations for how to exercise oversight regarding stablecoins.
While the COVID19 pandemic has derailed many regulatory policy priorities, we have spend the last few weeks seeing a steady acceleration of policy initiatives in this sector.
The 2020 Pandemic Payments Policy Cycle -- Eight Significant Moves
The short version: concerns about whether cash can transmit physical contagion, efforts to distribute fiscal stimulus efficiently, and concerns about increased retail exposure to fraud during a period of social distancing combine to create incentives for policymakers to accelerate their regulatory initiatives regarding stablecoins.
* Electronic Stimulus Distribution: The distribution of Stimulus #3 funding in the United States occurs through direct deposits, which is a form of electronic currency. Academics and privacy advocates will have a field day analyzing the implications of how the federal government can identify and issue payments directly to personal bank accounts. However, during the debate, not less than three different pieces of legislation were introduced to accelerate American reliance on digital payments. These included bills from Sen. Sherrod Brown (Senator Sherrod Brown's bill authorizing banks and post offices to provide "digital wallets" and two bills in the House (one introduced by the Speaker of the House, the other introduced by the Chairman of the Financial Services Committee) referencing a “digital dollar” and, amazingly, authorizing the Federal Reserve to create a direct relationship with individuals in order to distribute the digital dollars.
* IOSCO Report: The International Organization of Securities Commissions released a report detailing how it expects to extend the regulatory perimeter to stablecoins. From a standards perspective, the report largely re-hashes and fine-tunes last year’s policy pronouncements.
* Bank of England (Wholesale Distribution Steering Group) : The Bank of England today released minutes of a meeting by the Wholesale Distribution Steering Group, which is responsible for designing “a new end-state model for wholesale cash distribution.” While the meeting occurred pre-crisis (in January), the group’s workplan includes a consultation release in April or May. Don’t be surprised to see a late spring suggestion for how the UK can accelerate adoption of a central bank digital currency. * Commodity Futures Trading Commission: The Commodity Futures Trading Commission issued an interpretive guidance designed to increase flexibility regarding the regulatory treatment of "physical delivery" for cryptocurrency trading.
* Monetary Authority of Singapore: The MAS issued a formal statement actively urged individuals and businesses to rely on digital payments rather than bank visits (and, implicitly, rather than cash) in order to combat COVID19 transmission. The central bank will also be launching a promotional campaign to increase adoption of existing contactless and digital payments.
* The Financial Stability Board: Released a report to the Group of Twenty that establishes a “roadmap to enhance cross-border payments.” The accompanying technical note makes clear that policymakers mostly aim at addressing frictions and inclusion issues associated with remittances (high volume, low value personal transactions). The Annex also describes how distributed ledgers could function within financial systems. Only two of those use cases involve shared ledgers. Only one of those use cases involved relying on a third party to manage the ledger. * The Bank of England: Hosted a webinar focused on possible architectural options and policy considerations associated with central bank digital currencies. In the webinar, central bank officials clearly expressed a preference for structures that would rely on third-party ledger technologies. Their preference is understandable. Direct relationships between individuals and central banks raise very tricky issues regarding personal privacy, central bank independence, and accountability within democracies. The FSB paper thus implicitly endorses the model Bank of England officials said in the webinar that they favor (third party ledger management).
* The Banque de France: Formally announced a public experiment regarding central bank digital currency. Submissions from third parties are due on 15 May 2020. The central bank will conduct interviews in June and select participants in July 2020.
Given the activity levels and the geographic distribution of activity during the pandemic, it would frankly have been surprising if the FSB had failed to act this week.
Today's FSB Stablecoin Proposal
The substance of today's proposal is not surprising. The proposal adopts a functional regulation approach, extending the regulatory perimeter in relation to specific functions rather than in relation to corporate form. Annex 2 helpfully maps perceived vulnerabilities with preferred regulatory policy solutions.
The details will keep attorneys and advocates busy for the next few weeks preparing responses. For today's post, the main point to highlight is that the FSB proposal presents a comprehensive framework for extending the full range of financial regulation over stablecoin issuers, regardless of which asset they choose as their reference rate.
Stablecoins do not need to be linked to a sovereign currency in order to attract compliance requirements under the proposal