The working group of the G7 has released a report detailing the potential risks a global stablecoin (GSC) could pose to nations and economies worldwide. GSCs will have to address these concerns to be considered for approval, the report said, adding that addressing the outlined risks will not guarantee regulatory permission to operate.
According to the G7, though stablecoins have highlighted shortcomings in cross-border payments and pose potential benefits to global economies, they run on largely untested, nascent technology. The report identified crypto-assets as having served as a highly speculative asset class for certain investors and those engaged in illicit activities, rather than as a means to make payments.
“The G7 believes that no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks. That said, depending on the unique design and details of each stablecoin arrangement, approval may be contingent on additional regulatory requirements and adherence to core public policy goals.”
Further, the report added that GSCs pose risks to the transmission of monetary policies and the financial stability of countries, specifically considering the case of a stablecoin linked to a basket of foreign currencies. The working group said that GSCs could enable large-scale capital outflow from a country during times of domestic financial instability, and the speed of GSC transactions could become disruptive in periods of turmoil, where authorities may not have enough time to efficiently intervene.
GSCs must also be as stable as advertised, and if value stabilization of the asset relies on market mechanisms, legal obligations of market-makers must be clearly defined to ensure liquidity at all times. If the stablecoin’s reference asset includes bank deposits, they cannot be exposed to the credit and liquidity risks of the underlying bank, the report said. Further, the working group discussed how a GSC using a proprietary system could be used to prohibit or raise barriers of entry to the system and its associated range of services.
Additionally, if more users start holding deposit-like accounts using GSC platforms, retail deposits at banks will decline, which in turn would increase bank dependance on more costly and volatile sources of funding, the working group’s report said.
The report also encourages finance ministries, central banks and relevant international organizations to continue making efforts to produce faster, cheaper and more reliable payments systems for cross-border payments.
“It is important that the private and public sectors continue to explore innovative ways to make payments better, reduce inefficiencies and be more inclusive. In particular, the public sector should redouble its efforts to reduce frictions in international payments and support measures to improve financial inclusion.”
Though the report does not talk about any stablecoin or company in particular, it is evident that the risks outlined must be addressed by Facebook and The Libra Association if they wish to receive regulatory approval from G7 countries. Libra has already been pre-emptively banned in France and Germany.
The Libra Association has since responded to the G7, stating that the project will operate with transparency and in partnership with regulators. A statement said,
“The Libra Association is committed to building a system that replicates or exceeds current standards for consumer protection, financial stability, and global cooperation to prevent money laundering and illicit finance while preserving national sovereignty over monetary policy.”
The report will be presented to finance ministers at an annual meeting of the International Monetary Fund this week.
