The Financial Stability Board (FSB) has issued a warning that many existing stablecoins may not comply with new risk management regulations currently in development.
Klaas Knot, the chair of the FSB, highlighted the inherent volatility and structural weaknesses of crypto-assets in a letter to G20 finance ministers, particularly in light of recent events like the collapse of FTX. He stressed the importance of regulatory oversight, stating, “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 pointed out that stablecoins pose a significant concern as they can act as a transmission mechanism for financial shocks, potentially escalating threats to financial stability. In response, the G20 has tasked the FSB with coordinating a thorough regulatory framework for crypto-assets, expected to be finalized later this year.
Recommendations for stablecoins include enhancing governance frameworks, clarifying and strengthening redemption rights, and ensuring effective stabilization mechanisms, among other revisions. Knot concluded, “The FSB’s work indicates that many existing stablecoins would not currently meet these high-level recommendations, nor would they adhere to the international standards set by the BIS Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions.”
Additionally, the FSB is intensifying its investigation into the complex realm of decentralized finance (DeFi), concerned about the potential spillover risks to traditional finance.