G7 watchdog warns of risks of private global stablecoins

In a new paper on stablecoins, the working group said that challenges and risks to monetary policy, financial stability, the international monetary system and fair competition arise where stablecoins are to be operated on a global scale.

"GSCs (global stablecoins) could have significant adverse effects, both domestically and internationally, on the transmission of monetary policy, as well as financial stability, in addition to cross-jurisdictional efforts to combat money laundering and terrorist financing," the paper said. "They could also have implications for the international monetary system more generally, including currency substitution, and could therefore pose challenges to monetary sovereignty. GSCs also raise concerns around fair competition and antitrust policy, including in relation to payments data. These risks, which are of a systemic nature, merit careful monitoring and further study."

The working group said businesses behind global stablecoin projects must address "a wide array of legal, regulatory and oversight challenges and risks", including in respect of money laundering, integrity of payment systems, consumer protection, data protection, cybersecurity and tax compliance.

The prospect of global stablecoins has attracted significant attention in recent months, in particular after a number of businesses set out plans to support a new global cryptocurrency in the Libra project. The backers of that project say their plans will support frictionless cross-border trade, better access to financial services for the world's unbanked, and the development of innovative new services. 

The G7's working group on stablecoins provided guidance on the standards that private entities will need to achieve to satisfy the demands of policy makers and regulators.

"Ambiguous rights and obligations could make the stablecoin arrangement vulnerable to loss of confidence – an unacceptable risk, especially in a payment system of potentially global importance," the working group said.

"Whether value stabilisation relies on market mechanisms, such as the existence of an active network of resellers, or a commitment by the issuer to redeem at a given price, it should be demonstrated that such arrangements will achieve their objectives at all times and for all customers. The governance structure of the arrangement as well as the investment rules of the stability mechanism must also be fully specified and understood by participants," it said.

Global stablecoin projects may also need to meet "additional regulatory requirements" and adhere to "core public policy goals", the working group said.

"Some risks are amplified and new risks might arise if adoption is global in nature," the paper said. "Stablecoin initiatives built on an existing – large and/or cross-border – customer base may have the potential to scale rapidly to achieve a global or other substantial footprint."

Andrew Barber, a specialist in financial services regulation at Pinsent Masons, the law firm behind Out-Law, said: "Perhaps deceptively, this latest report will be extremely encouraging to some. Libra has successfully brought non-bank payment systems to the head table of those who monitor systemic risk. This is a universally positive outcome, but the G7 report will be particularly useful as a rulebook for other global currency projects which have not yet been in the limelight. These might include the ‘single hegemonic currency’ envisaged by Mark Carney, or the utility settlement coin being developed by Finality in conjunction with 15 global banks."