The latest global regulatory recommendations validate stablecoins as much as threaten their identity

Last week, the Finan­cial Sta­bi­li­ty Board (FSB – glo­bal, G‑20 rela­ted finan­cial con­sul­ting body) publi­shed recom­men­da­tions con­cer­ning block­cha­in „sta­ble­co­ins”. The addres­se­es of recom­men­da­tions are cen­tral banks and finan­cial regu­la­tors; its sub­ject, sta­ble­co­ins, are cryp­to­cur­ren­cies fol­lo­wing the value of some tra­di­tio­nal asset, usu­al­ly US dol­lar, in con­trast to the vola­ti­le tra­di­tio­nal cryp­tos such as bit­co­in or ether. The paper has rece­ived some nega­ti­ve respon­ses from cryp­to finan­ce com­mu­ni­ty: the­ir read is that the docu­ment is effec­ti­ve­ly a call to ban sta­ble­co­ins altogether. 

Łukasz Jonak, Ana­li­tyk DELab UW

The gene­ral gist of the recom­men­da­tion can be sum­ma­ri­zed in the fol­lo­wing way: „sta­ble­co­ins („SCs”) could pose a num­ber of risks to the sta­bi­li­ty of the wider finan­cial sys­tem, the­re­fo­re they need to be tho­ro­ugh­ly regu­la­ted, and regu­la­to­ry autho­ri­ties aro­und the glo­be sho­uld make sure they are pre­pa­red to do that”. The FSB backs its posi­tion in two ways: by sho­wing a num­ber of sce­na­rios in which sta­ble­co­ins could desta­bi­li­ze tra­di­tio­nal finan­cial sys­tem by sim­ply inte­rac­ting with it, an by poin­ting at vario­us poten­tial vul­ne­ra­bi­li­ties within the machi­ne­ry of stablecoins.

The vulnerabilities of financial systems

Let’s start with the second argu­ment. The con­sul­ta­tion docu­ment descri­bes a num­ber of are­as in which sta­ble­co­in might pro­ve unre­lia­ble and beco­me a sour­ce of sys­te­mic risk to finan­cial sta­bi­li­ty. One is the finan­cial engi­ne­ering of sta­ble­co­ins, spe­ci­fi­cal­ly, the mecha­nism of the­ir sta­bi­li­za­tion. Most SCs are bac­ked by a rese­rve of tra­di­tio­nal, „fiat” cur­ren­cies. FSB wor­ries that this rese­rve might be not liqu­id eno­ugh, espe­cial­ly if for some reason the­re is a mas­si­ve move to convert sta­ble­co­ins back into tra­di­tio­nal currency.

Ano­ther vul­ne­ra­bi­li­ty has to do with the infra­struc­tu­re and gover­nan­ce of the GSC. FSB points out that sta­ble­co­ins need to be „anti­fra­gi­le” in are­as of key deci­sion making, resi­lien­ce aga­inst inter­nal and exter­nal attacks and gene­ral capa­ci­ty of the network. Simi­lar­ly, the tools on the user side, the wal­lets and exchan­ges they use, could be vul­ne­ra­ble in a num­ber of ways.

It is worth to men­tion that all the abo­ve risk fac­tors are com­mon to any advan­ced and com­plex eno­ugh eco­no­mic sys­tem; sta­ble­co­ins sha­re the­se risks with many tra­di­tio­nal finan­cial mecha­ni­sms con­sti­tu­ting the „wider finan­cial sys­tem” FSB guards sta­bi­li­ty of. The com­mu­ni­ty of cryp­to­eco­no­my and block­cha­in entre­pre­neurs, rese­ar­chers, deve­lo­pers and users is well awa­re of them (more often than not this know­led­ge is lear­ned in a hard way); the eco­sys­tem they are sha­ping is equ­ip­ped with mecha­ni­sms that pro­mo­te the miti­ga­tion of the­se risks as sta­ble­co­ins and „decen­tra­li­zed finan­ce” grow in popu­la­ri­ty and accu­mu­la­te value.

Stablecoins as disruptors

Appa­ren­tly, FSB expects that the inter­nal risk of „sta­ble­co­ins” can and will be miti­ga­ted. Other­wi­se it would­n’t be expec­ting some cryp­to­cur­ren­cies to beco­me so wide­spre­ad as to gain the sta­tus of „Glo­bal Sta­ble Coins” of „sys­te­mic impor­tan­ce”; it is dif­fi­cult to ima­gi­ne that inse­cu­re, unsta­ble, unre­lia­ble pro­ject could ever reach the sta­tus of a „GSC”. The second line of argu­men­ta­tion offe­red by FSB reve­als the object of the real wor­ry of the Board: not poor­ly desi­gned and gover­ned cryp­to­cur­ren­cies, but tho­se relia­ble eno­ugh to beco­me actu­al influ­en­ce on the tra­di­tio­nal finan­cial system. 

Couple of sce­na­rios inc­lu­ded in the docu­ment say as much. For exam­ple, Glo­bal Sta­ble Coin could gene­ra­te too much finan­cial traf­fic for the „wider finan­cial sys­tem” to han­dle, thus cau­sing the lat­ter to desta­bi­li­ze. The FSB warns aga­inst the sce­na­rio in which par­ti­ci­pants of some local tra­di­tio­nal eco­no­my going thro­ugh cri­sis could en mas­se move the­ir assets to the more effi­cient and safer block­cha­in based eco­no­my, exa­cer­ba­ting the cri­sis. The­re is also a wor­ry that the value of use­r’s funds deno­mi­na­ted in GCSs” might fluc­tu­ate with the chan­ges of the pri­ces of the sta­ble­co­in (I assu­me due to the fluc­tu­ation of under­ly­ing tra­di­tio­nal asset). This would tho­ugh equ­al to say­ing that sta­ble­co­in user is expo­sed to the vola­ti­li­ty of, say, the USD.

It is worth poin­ting out that in the abo­ve sce­na­rios the pro­blems seem to stem from the tra­di­tio­nal finan­cial sys­tems, pre­su­ma­bly the­ir ina­de­qu­ate gover­nan­ce, eco­no­mic design or tech­ni­cal infrastructure.

One thing that the FSB con­sul­ta­tion docu­ment makes cle­ar is that cryp­to­cur­ren­cies, cryp­to eco­no­my, is no lon­ger con­si­de­red a suspi­cio­us, obscu­re and ulti­ma­te­ly irre­le­vant hubris of uto­pian tech­no­phi­les. FSB calls for regu­la­tion not becau­se of the unre­lia­bi­li­ty of sta­ble cryp­to­cur­ren­cies, but becau­se it expects them to pro­po­se eno­ugh secu­ri­ty and eco­no­mic uti­li­ty to beco­me a glo­bal instrument.

Stablecoins of the giants and of distributed nobodies

Pre­su­ma­bly what made the glo­bal regu­la­to­ry autho­ri­ties take cryp­to­cur­ren­cies and spe­ci­fi­cal­ly sta­ble­co­ins serio­usly was the anno­un­ce­ment of Face­bo­ok’s Libra sta­ble­co­in. The wor­ding of a num­ber of sta­te­ments and reco­men­da­tions issu­ed sin­ce then by vario­us glo­bal finan­cial orga­ni­za­tion sug­ge­sts that what needs to be regu­la­ted and ulti­ma­te­ly kept in check is a glo­bal digi­tal cur­ren­cy cre­ated and con­trol­led by a new to the world of finan­ce, but alre­ady power­ful (in terms of money, mar­ked reach, data col­lec­ted) cor­po­ra­te, com­mer­cial enti­ty such as Face­bo­ok, Ama­zon of Apple. Howe­ver the recent FSB docu­ment adds ano­ther thre­at pro­fi­le – decen­tra­li­zed cur­ren­cies. The behe­mo­ths, like Face­bo­ok, are power­ful, but still a conve­nient sub­ject of regu­la­tions. Decen­tra­li­zed sta­ble­co­ins tho­ugh are a thre­at to the very abi­li­ty of being regu­la­ted, becau­se of the­ir vague gover­nan­ce struc­tu­re, the ambi­gu­ity abo­ut what is the enti­ty respon­si­ble for its ope­ra­tions. The­re­fo­re, in the FSB con­sul­ta­tion docu­ment, the word „pro­hi­bi­tion” pops up here and the­re in the con­text of exten­si­ve­ly distri­bu­ted stablecoins.

Regulations between guidance and control

It is dif­fi­cult to bla­me cryp­to­cur­ren­cy com­mu­ni­ty for sharp respon­se to the FSB’s con­sul­ta­tion. The part of the evo­lu­tion of cryp­to­cur­ren­cy and block­cha­in com­mu­ni­ty is the emer­gen­ce of a nati­ve pro­cess of ensu­ring that the eco­sys­tem of pro­ducts it gene­ra­tes is relia­ble and use­ful. In the con­text of this pro­cess it is possi­ble to per­ce­ive the exter­nal regu­la­to­ry pres­su­re in a con­ci­lia­to­ry and prag­ma­tic way — as a sour­ce of guide­li­nes and best prac­ti­ces to be uti­li­zed as the com­mu­ni­ty and pro­ducts matu­re. Howe­ver, the FSB recom­men­da­tions might make it dif­fi­cult to con­ti­nue this kind of inter­pre­ta­tion. The incre­ase of popu­la­ri­ty of sta­ble­co­ins is con­si­de­red by the regu­la­tor not as a sign of matu­ra­tion of the sys­tem, but a thre­at signa­tu­re. The inter­nal stan­dards deve­lo­ped and enfor­ced by the com­mu­ni­ty, vali­da­ted by wide adop­tion of pro­ducts and servi­ces, seem to mean lit­tle if they don’t match clo­se­ly the „wider” regu­la­to­ry fra­me­work. The very ina­bi­li­ty to be scru­ti­ni­zed due to decen­tra­li­za­tion, no mat­ter how water­pro­of the sys­tem, is a major red flag for regu­la­tion com­mu­ni­ty. It is easy to see this stan­ce not as a pro­vi­sion of guidan­ce, but as a form of con­trol. The reali­ty is, the lat­ter is the man­da­te of the regulation.

The cryp­to­eco­no­my and block­cha­in world doesn’t exac­tly aspi­re to be encom­pas­sed by „wider finan­cial sys­tem”. It doesn’t con­si­der itself just a pro­vi­der of inno­va­ti­ve tech­no­lo­gies to impro­ve the world of tra­di­tio­nal banks and stock exchan­ges. Appa­ren­tly it has its own ide­as abo­ut how cer­ta­in public goods — con­sen­sus, the sys­tem of cre­ation, trans­mis­sion, sto­ra­ge of value, mana­ge­ment of repu­ta­tion, pro­vi­sions for sys­te­mic secu­ri­ty, and many others — sho­uld be cre­ated and gover­ned. The Finan­cial Sta­bi­li­ty Board recom­men­da­tions seem to serio­usly thre­aten this identity.

Autor pro­jek­tu: Łukasz Jonak

Pro­jekt finan­so­wa­ny ze środ­ków pro­gra­mu „Dia­log” MNiSW