The G7 has released a new 37-page report on cryptocurrencies entitled, “Investigating the impact of global stablecoins.”
The international intergovernmental economic organization is comprised of the seven largest advanced economies in the world, as designated by the International Monetary Fund. They are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, countries that have launched a number of entrepreneurs and computer scientists who are building robust blockchain-based platforms and infrastructure that is challenging the banking elite and the financial services industry.
Here are the highlights from the report.
Cross-border payments remain slow, expensive and opaque
Given the innovative potential of the underlying technology, cryptoassets were originally envisioned to address some of these challenges. However, to date, they have suffered from a number of limitations, not least severe price volatility. Thus, cryptoassets have served as a highly speculative asset class for certain investors and those engaged in illicit activities, rather than as a means to make payments.
Stablecoins have many of the features of cryptoassets but seek to stabilise the price of the “coin” by linking its value to that of a pool of assets. Therefore, stablecoins might be more capable of serving as a means of payment and store of value, and they could potentially contribute to the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements. That said, stablecoins are just one of many initiatives that seek to address existing challenges in the payment system and, being a nascent technology, they are largely untested.
Bitcoin
The first wave of cryptoassets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value. They have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments.
Stablecoins
At present, emerging stablecoins have many of the features of more traditional cryptoassets but seek to stabilise the price of the “coin” by linking its value to that of an asset or pool of assets. The term “stablecoin” has no established international classification, and such coins may not actually be stable and may pose risks that are similar to those of other cryptoassets.
This report focuses on stablecoins that represent a claim, either on a specific issuer or on underlying assets or funds, or some other right or interest.
Challenges Posed by Stablecoins
Stablecoins present a host of potential challenges and risks for public policy, oversight and regulation, including legal certainty, sound governance, anti-money laundering and countering the financing of terrorism (AML/CFT) compliance, operational resilience (including for cyber security), consumer/investor and data protection, and tax compliance.
Identified Risks of Stablecoins
Stablecoins, regardless of size, pose legal, regulatory and oversight challenges and risks related to:
• Legal certainty
• Sound governance, including the investment rules of the stability mechanism
• Money laundering, terrorist financing and other forms of illicit finance
• Safety, efficiency and integrity of payment systems
• Cyber security and operational resilience
• Market integrity
• Data privacy, protection and portability
• Consumer/investor protection
• Tax compliance
Identified Risks of Global Stablecoins That Can Reach Massive Scale
Monetary policy
• Financial stability
• The international monetary system
• Fair competition
Legal Status of Stablecoins
As regards the legal characterisation of stablecoins, the most relevant determinative factors are whether or not they are considered as a money equivalent; categorised as contractual claims or property rights; or entail a right against an issuer or against underlying assets. In some jurisdictions, stablecoins may constitute a security or financial instrument, such as a debt instrument, or represent an interest in a fund or collective investment vehicle and be subject to applicable laws relating to securities and financial instruments.
Differentiating Stablecoins
[…] the Libra Association has proposed making its stablecoin accessible to everyone, and so it is considered a retail stablecoin, while USC is intended for use only by financial institutions that are part of the USC consortium, so it is considered it a wholesale stablecoin.
The exchange rate policy can be fixed or variable. Wholesale stablecoins that fall under the depository receipt model are designed to be a tokenised representation of the issuers’ underlying liability (customer deposits), and hence have fixed exchange rates. This means that these tokens are purchased and redeemed at exactly the same nominal value. Other stablecoins, even those that claim to be backed 100% by a single currency, will have a price that may fluctuate relative to that (or any other) currency. Tether, TrueUSD and Paxos are all listed on crypto exchanges and have exchange rates that fluctuate (in some cases more than others) around the US dollar.
To date, only two categories of stablecoins have been observed: wholesale stablecoins with a fixed exchange rate; and retail stablecoins with a variable exchange rate. Wholesale applications are aimed at replicating or replacing existing processes for settlement in commercial bank or central bank money, and hence wholesale applications with a variable exchange rate are not consistent with this objective. The emergence of retail stablecoins with a fixed exchange rate seems plausible; however, no examples exist at present.
Conclusion
We encourage central banks, finance ministries, standard-setting bodies such as the CPMI [Committee on Payments and Market Infrastructures] and relevant international organisations to develop road maps for improving the efficiency and lowering the cost of payments and financial services. Initial recommendations are outlined in the report. Additionally, central banks will continue to share knowledge of, and experience on, a variety of possible solutions to improving payment systems. Finally, central banks, individually and collectively, will assess the relevance of issuing central bank digital currencies (CBDCs) in view of the costs and benefits in their respective jurisdictions.
You can check out the full report here.
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