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OR01/2020 Global Stablecoin Initiatives Global Stablecoin Initiatives Public Report The Board OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS OR01/2020 MARCH 2020 Global stablecoin initiatives Executive Summary Global stablecoin initiatives may, depending on their structure, present features that are typical of regulated securities or other regulated financial instruments or services. This paper identifies possible implications that global stablecoin proposals could have for securities market regulators. The content includes some background to the genesis and development of the paper, together with an overview of different stablecoin designs (Section 2), and a hypothetical case study (“Hypothetical Case Study”) (Section 3). The paper then explores how existing IOSCO Principles and Standards could apply to global stablecoin proposals like the Hypothetical Case Study (Section 4). Finally, the paper undertakes an assessment of the broader implications for securities regulators (Section 5). In parallel, together with the CPMI, IOSCO has carried out a separate preliminary analysis (hereinafter termed “CPMI-IOSCO Analysis”) on the application of the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI), which is available at Annex 1. The CPMI-IOSCO Analysis concludes that the PFMI apply to global stablecoin arrangements where such arrangements perform systemically important payment system functions or other FMI functions that are systemically important; and could therefore apply to the Hypothetical Case Study. In addition, IOSCO members conclude that the IOSCO Policy Recommendations for Money Market Funds (MMF Recommendations), the IOSCO Principles for ETFs, the Final Report on Crypto-Asset Trading Platforms and IOSCO work on Market-Fragmentation, Cyber Resilience, and Client Assets could apply to global stablecoins such as the Hypothetical Case Study. Ultimately, the applicability of any IOSCO Principles or Standards to global stablecoin proposals, including those similar to the Hypothetical Case Study, will depend on their specific design and their legal and regulatory characteristics and features, which need to be determined on a case-by-case basis, taking into account the domestic legal and regulatory frameworks and approaches in each jurisdiction. IOSCO has established a Stablecoin Working Group within its Fintech Network to consider and evaluate global stablecoin proposals from securities market regulators’ perspectives. This report is IOSCO’s first published contribution to the ongoing public debate at international organisations and standard-setting bodies on global stablecoin proposals (e.g. the G7 and the FSB.)1 The Stablecoin Working Group will continue to assess key issues arising from the analysis in this paper and emerging stablecoin proposals. IOSCO encourages a globally coordinated cross-sector response to the international regulatory challenges posed by global stablecoin proposals. 1 See https://www.fsb.org/wp-content/uploads/P181019.pdf 2 1. Introduction Overview Early crypto-assets, including Bitcoin, designed as a means of payment, have typically suffered from high volatility with respect to established fiat currencies. In order to harness the potential benefits of payments using a form of crypto-asset, various private entities have since endeavoured to design a more suitable low-volatility crypto-asset – a so-called ‘stablecoin’. These initiatives include proposals with potential global reach and adoption; so-called ‘global stablecoins’, likely to be issued by large incumbent global technology firms. This paper discusses potential issues that may arise from stablecoins with potential global reach and adoption. This paper includes a Hypothetical Case Study that raises many global financial regulatory issues. Any discussion of such a Hypothetical Case Study is not intended as guidance or conclusions as to any potential stablecoin project. As described in more detail below, the Hypothetical Case Study is a stablecoin which could act as a global currency and potential financial infrastructure used for domestic and cross-border payments, that uses a reserve fund and intermediaries as a means to achieve a stable price. The paper sets out the Hypothetical Case Study and how it could interact with the perimeter of securities-market regulators’ remits and discusses, at a high level, how some of the relevant IOSCO Principles and Standards could apply. This paper does not provide an account of how any particular jurisdiction’s domestic regulation might apply to global stablecoin proposals. 2. Stablecoins This paper uses the term ‘crypto-asset’ rather than ‘cryptocurrency’ as it is a more neutral term that captures a broader range of tokens. Use of the term cryptocurrency could be regarded as unhelpful since these assets do not in general fulfil the core economic criteria of money – as a unit of account, a stable store of value and efficient means of exchange2. ‘Stablecoins’ are often considered to be a type of crypto-asset. The term stablecoin is a broad term, which encompasses a variety of different types of assets, including assets that may be considered securities in certain jurisdictions. It has no legal or agreed definition itself. Stablecoins are marketed as having less price volatility than other crypto-assets and, it is argued, are more appropriate for certain use cases. Stablecoin initiatives often aim to create a store of value and means of exchange that is global, efficient and accessible. While stablecoins seek to reflect a set of characteristics (i.e. price stability) they do not form a self-contained type of crypto-asset. Stablecoins could be pegged to and/or backed by particular assets, algorithmically controlled, or their value can float freely. It should be noted that several currently-traded stablecoins are not “backed” by reference assets and stablecoin holders are not entitled to redemption (at face value). A stablecoin can take many forms and can reference the following assets: 1) Fiat currencies. A crypto-asset can be related to one or more fiat currencies. Those fiat currencies may or may not be safeguarded in deposit. 2) Other real-world assets. A crypto-asset can be related to real-world assets such as securities, commodities, real-estate, financial instruments and/or other assets. 2 https://www.bankofengland.co.uk/speech/2018/mark-carney-speech-to-the-inaugural-scottish- economics-conference 3 3) Other crypto-assets. A crypto-asset can be related to one or more other crypto-assets. 4) Algorithmically controlled. A crypto-asset can use an algorithm that attempts to mimic monetary policy. For instance, the stablecoin may employ an algorithm to achieve specific crypto-asset-monetary targets by adjusting the supply of tokens to match demand. Even where there is an “algorithm” that seeks to ensure the stability, there may be a central managing entity with the ability to intervene in the operation of the algorithm with a view to maintaining price stability.3 A stablecoin’s features or the way it is used could mean that it falls under several categories at any one time or at different points in its lifecycle. Stablecoins can exhibit a wide range of different features. This means that stablecoins can, depending on their structure, fall within or outside a variety of different regulatory frameworks for financial instruments or services. Similarly, despite their label, many so-called stablecoins are neither “stable” nor “coins” in the true sense of either word. So, whilst stablecoin is a marketing term that has been widely adopted by industry, more neutral terms, may be more accurate starting points for regulatory analysis in many instances. For the purposes of this paper, the term stablecoin will be used with the above caveat.4 The Hypothetical Case Study A company (“Company”) has determined to design a platform using distributed ledger technology to issue a crypto-asset (“Coin”) that is intended to act as a stablecoin. This stablecoin is intended to act as a means of exchange on the Company’s designed platform and accessible also by third parties. The Company and third-party participants in the platform intend to offer goods and services in exchange for Coin. Company also anticipates that unaffiliated third parties developers will create use cases for Coin. Company has stated that Coin will be backed by assets that are held in accounts at a number of global financial institutions (collectively, the “Reserve Fund”) that is managed by the Company pursuant to policies set by its governance board and that Coin’s market value will be maintained in line with the value of the assets held in the Reserve Fund. Under Company’s proposed ecosystem, the Company will operate a permissioned blockchain that will use a consensus mechanism, for keeping a record of transactional and ownership information of the Coin. Company has stated that the Reserve Fund will be managed with the goal of value preservation and liquidity. The Reserve Fund will be composed of low volatility currencies, bank deposits 3 It should be noted that this is not a full set of monetary policy tools. 4 We note that other initiatives are currently considering emerging stablecoin initiatives and developing definitions for the term “stablecoin”. For example, the Financial Stability Board has said that “A 'stablecoin’ can be defined as a crypto-asset designed to maintain a stable value relative to another asset (typically a unit of currency or commodity) or a basket of assets. These may be collateralised by fiat currency or commodities or supported by algorithms. The term is used to describe a particular set of crypto-assets with certain design characteristics or stated objectives, but the use of this term should not be construed as any endorsement or legal guarantee of the value or stability of these tokens” (https://www.fsb.org/wp-content/uploads/P181019.pdf). 4 and sovereign debt instruments. Company expects that the financial instruments held in the Reserve Fund will be stable and liquid, and the value of which will be reflected in the total value of the outstanding number of Coins, through the Authorised Participant mechanism. Company expects that there will be a number of other participants who will play a role in the ecosystem and the Coin.
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