**UPDATED POST** The Empire Strikes Back Redux -- #Stablecoin Policy On the Move

Updated: Aug 31

****This post was originally published on 16 October 2019. It was updated on 31 August 2021 to include the full time series from our patented policy risk measurement platform. The multivariate time series graphically illustrates what policy professionals know instinctively: the policy reaction function is iterative and often generates consequential outcomes that can take years to translate into binding standards, rules, and laws******

The policy reaction function for 2019 as a whole looked like this

when measured using our award-winning, patented process:

On Sunday, when the Financial Stability Board (FSB) released its annual report to the Group of Twenty (G20) finance ministers and central bank governors, they devoted nearly a full page to stablecoin regulation policy. We noticed and published THIS POST analyzing the report.

The week so far has been full of important policy statements on this topic from key policymakers. Mostly notably, last night the Federal Reserve finally broke its months-long silence on stablecoins, cryptocurrency, and CDBCs (central bank digital currencies).

For today's blog, let's focus on what policymakers have said in the 72 hours from Sunday night to Wednesday night. Remember in the process that private issuers of value tokens pre-date central banks and that the ability to manage a currency (reserve, basket, or board) is far from easy as the infographic below indicates.

The policy trajectory is clear: the policy crosshairs point first to stablecoins whose value is most closely linked to global reserve currencies.

Financial Stability Board

"Stablecoin projects of potentially global reach and magnitude must meet the highest regulatory standards and be subject to prudential supervision and oversight. Possible regulatory gaps should be assessed and addressed as a matter of priority."

Banque de France

"While it is clear that crypto-assets undergoing technical and economic trials bring about opportunities to improve our payment systems, they can also bring material risks to our payment systems which, if unaddressed, might introduce new sources of fragmentation, instability and fraud. In that context, beyond contributing to the adaptation of the regulatory framework to address those risks, central banks may contribute further in revisiting and possibly improving the conditions under which they make available central bank money for settlement purposes."

European Central Bank

"The list of issues raised by all stablecoin projects is already quite long, as you know from our July report. They relate to legal certainty to put it simply, on what or whom is the stablecoin a claim and also to the governance and the architecture of each project. Other aspects have to do with compliance with money laundering and anti-terrorism financing rules and the question of whether a stablecoin payment system is safe and efficient enough. We can use existing international standards as a reference in this regard. Then there are issues related to operational resilience and cybersecurity, market integrity and investor protection, and data protection, particularly segregation between payment data and data being produced in a social network. And you have issues with tax compliance. Whenever these projects are based on existing global networks, theres a chance that they may reach a critical size very quickly, which raises additional potential issues relating to financial stability, monetary policy and the functioning of the international monetary system."

Federal Reserve

"Libra, and indeed any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges before it can facilitate a first payment...First, compliance with know-your-customer rules and regulations are essential to ensure stablecoins are not used for illegal activities and illicit finance...Second, issuers of stablecoins designed to facilitate consumer payments must clearly demonstrate how consumer protections would be assured. ..Third, it will be necessary to define the financial activities that the various players in the Libra ecosystem are conducting in order for jurisdictions to assess whether existing regulatory and enforcement mechanisms are adequate...Finally, there are likely to be financial stability risks for a stablecoin network with global reach. If not managed effectively, liquidity, credit, market, or operational risks—alone or in combination—could trigger a loss of confidence and a classic run."

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