IMF Stablecoin Regulation Paper and BIS’ Project Icebreaker

Coinfirm’s Regulatory Affairs overviews recent papers and initiatives from the International Monetary Fund and the Bank for International Settlements, including the:

• IMF Paper: Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements
• BIS: Central banks of Israel, Norway and Sweden Team up with the BIS to Explore Retail CBDC for International Payments

_{IMF Paper: Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements}

The IMF paper – Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements – intends to address the key requirements for a global regulatory framework for stablecoins. Cross border nature of crypto assets and inherent risks pertaining particularly to stablecoins increase the importance of consistent regulatory framework and coordinated standards. IMF notes that it is the Financial Stability Board (FSB) that is best suited to take the lead in coordinating and establishing global standards to support national regulation of crypto assets, including stablecoins.

The paper sets out high level requirements for stablecoins regulatory framework.

The global regulatory framework for stablecoins should be:

• Comprehensive and flexible, i.e.
  • Covering all applicable entities including issuers, crypto asset service providers and reserve managers
  • Covering more than just the final economic function which can change over time and jurisdictions (e.g. stablecoin may be used for payment in one country, but as inflation hedge in another country)
• Provide a level playing field, i.e. proportionate to the risks, structural features and economic functions of the stablecoin
• Risk based, i.e ensuring that entities providing multiple functions are subject to greater prudential requirements

The requirement for a Risk-Based Approach to stablecoins regulation means that the level of regulation should depend on the stablecoin’s risks – which are determined through its characteristics and usage. For example:

• Stablecoins offering redemption into cash on demand
  • Should be fully backed
  • May be regulated similarly to e-money frameworks and banking regulations
• Stablecoins offering redemption within an elapsed time
  • May be backed with safe, but less liquid assets
  • May be regulated similarly to money market funds (MMFs)

Stablecoins regulatory frameworks should address wide range of  components of the stablecoins ecosystem performing the following functions:

• Issuance, redemption and stabilisation (involving e.g. issuers, custodians, and market makers)
• Transfer (involving e.g. network validators and operators)
• Access (e.g. wallets and exchanges)

The regulatory framework covering the above elements of the stablecoins ecosystem comprehensively should address:

• Financial stability
• Consumer protection
• Credit risks
• Market risks
• Liquidity risks
• Operational risks
• Financial risks
• Market integrity risks
• Concentration risks

The IMF notes that individual countries may need to take different regulatory adjustments to address these requirements (depending on the stablecoin arrangement and country circumstances); however, the paper reiterates that the countries must treat as essential:

• Authorities should consider the most efficient and effective approach give the country’s circumstances (example: less resource intensive approach – to narrow the stablecoin issuers to entities that are already regulated)
• All entities performing functions in stablecoin ecosystem must be licensed or authorized (either through bespoke regulation or fitting into the existing regulatory frameworks that will be adjusted)
• Issuers that become systemically important must be subject to the authorities’ analysis and regulatory requirements relevant to new risks identified

The paper highlights numerous challenges in achieving a comprehensive and globally effective framework for stablecoins regulation; however, it notes that restricting the use of stablecoins is not an option in the long run: “The alternative of restricting certain uses of stablecoins or imposing complete bans, while attractive in the short term, may constitute a disproportionate response to risk and is likely to be difficult to enforce in the long run.”

_{BIS: Central banks of Israel, Norway and Sweden Team up with the BIS to Explore Retail CBDC for International Payments}

The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden are launching Project Icebreaker, a joint exploration of how Central Bank Digital Currencies (CBDCs) can be used for international retail and remittance payments.

Project Icebreaker is a collaboration between the Bank of Israel, Central Bank of Norway, Sveriges Riksbank and BIS Innovation Hub Nordic Centre to develop a ‘hub’ to which participating central banks will connect their domestic proof-of-concept CBDC systems. The objective is to test some specific key functions and the technological feasibility of interlinking different domestic CBDC systems.

The project will run through the end of the year, with a final report expected in the first quarter of 2023.