Application of the Principles for Financial Market Infrastructures to stablecoin arrangements
With the emergence of stablecoins, and in light of their potential impact on the financial system, the G7, the G20 and the Financial Stability Board (FSB) called upon the standard-setting bodies to revise standards and principles or provide further guidance supplementing existing standards and principles, as needed. These standard-setting bodies include the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
Against this background, this report provides guidance on the application of the Principles for financial market infrastructures (PFMI) to systemically important stablecoin arrangements (SAs), including the entities integral to such arrangements. This report is not intended to create additional standards for SAs but rather to provide more clarity to systemically important SAs and relevant authorities as those SAs seek to observe the PFMI. Although this report provides guidance on only a subset of principles, a systemically important SA primarily used for making payments would be expected to observe all of the relevant principles including those principles for which no further guidance is provided in this report. This report also does not cover issues specific to stablecoins denominated in or pegged to a basket of fiat currencies (multicurrency SAs), as they will be covered in future work to consider whether the guidance in this report is sufficient to provide clarity to multicurrency SAs when seeking to observe the PFMI.
Stablecoins’ usability as a means of payment relies on the core functions performed by SAs. In particular, the SA “transfer function” enables the transfer of coins between users and typically entails the operation of a system, a set of rules for the transfer of coins between or among participants, and a mechanism for validating transactions. The transfer function of an SA is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI. This report provides considerations to assist relevant authorities in determining whether an SA is systemically important.
Notwithstanding the fact that the transfer function of SAs is considered an FMI function for the purpose of applying the PFMI, SAs may present some notable and novel features as compared with existing FMIs. These notable features relate to: (i) the potential use of settlement assets that are neither central bank money nor commercial bank money and carry additional financial risk; (ii) the interdependencies between multiple SA functions; (iii) the degree of decentralisation of operations and/or governance; and (iv) a potentially large-scale deployment of emerging technologies such as distributed ledger technology (DLT).
The CPMI and IOSCO believe that guidance on the application of the PFMI with respect to these features of SAs is useful for SAs and relevant authorities in applying the PFMI to systemically important SAs. The guidance provided in this report is summarised in Table 1 below. This guidance focuses on a subset of the PFMI for which the CPMI and IOSCO consider that guidance is warranted in light of notable features of SAs as compared to existing FMIs. This guidance should be read in conjunction with the relevant principles, key considerations and explanatory notes of the PFMI as well as further considerations provided in Section 3.
The full report is available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD685.pdf