Dragon White: Is it difficult to get out of it? Global Stabilization Currency Risks and Challenges

Author: Long Tao White

Bitcoin is the most well-known first-wave encryption asset and has so far failed to provide reliable and attractive means of payment or value storage. They exhibit extreme price volatility, limited throughput, unpredictable transaction costs, limited or lack of governance, and limited transparency.

Currently, emerging stable currencies have many of the characteristics of traditional cryptographic assets, but attempt to stabilize the “coin” price by linking their value to the value of the asset or pool of assets. "Stabilized currency" may actually be unstable and may pose a similar risk to other cryptographic assets. In October 2019, the G7 Stabilization Coin Working Group completed the Global Stability Coordination Report (hereinafter referred to as the “G7 Report”) and submitted it to the G20 meeting. The G7 report focuses on stable currencies that represent certain claims, or claims of specific issuers, or claims of underlying assets or funds or other rights or interests.

Stabilizing coins pose a range of potential challenges and risks to public policy, oversight and management. These risks can be partially resolved within the existing management and oversight framework, but there may also be regulatory loopholes. Regulatory and policy frameworks should be technically neutral and should not impede innovation as long as they do not conflict with public policy objectives, including monetary sovereignty.

Some of the stable coins supported by large technology or financial companies have a large customer base, so it is possible to rapidly expand their global business. These are called "Global Stable Coins: GSCs." At present, it is possible that GSC may only be Libra issued by Facebook. Therefore, the discussion about stable currency or GSC in this article has no special instructions and applies to Libra.

The FSB Stabilization Coin Working Group has taken over the GSC regulatory issues. The FSB will submit a preliminary draft of the consultation report in April 2020, the final draft in July. The FSB's official report is a recommendation for the global stabilizing currency regulatory policy. Therefore, it can be considered that the work of the FSB will clear the legal and regulatory obstacles for the development of stable currencies.

Since 2008, although countries have formulated various laws, regulations, and regulatory frameworks for the crypto-asset industry, countries are basically self-existing and have significant regulatory differences. In sharp contrast, since Facebook released the Libra white paper on June 18, 2019, the G7 immediately established the G7 working group to assess the risk of stable currency in July. After March, the G20 countries are in the process of stabilizing the risk and regulatory policy. A consensus has emerged that emphasizes international communication and collaboration to ensure consistent risk mitigation of GSC across the globe. The fundamental reason for global regulation to deal with traditional encryption assets and stable currencies is that they never think that traditional encryption assets are “currency” but have determined that stable currency is “currency”.

After the release of the G7 report, the author translated and proofread the Chinese text of nearly 20,000 words, and felt that it was responsible for timely transmitting the international work results related to the regulation of stable currency to domestic readers. Therefore, this article is an interpretation of the G7 report, combined with Libra, USDT and digital technology solutions of large technology companies for case analysis.

Stabilizing the ecosystem of coins

Three stabilization mechanisms

There are at least three design models. First, the nominal value of the issued currency is expressed in commonly used unit of account. The user has a direct claim against the issuer or the underlying asset, and the provider promises to convert the stable currency with the currency used to purchase the stable currency. The assets in this model are usually mobile. In the second model, the issuance of stable coins does not have a specified face value, but rather constitutes a share of the underlying asset portfolio, just like an exchange-traded fund (ETF). In the third model, the stable currency is backed by claims against the issuer. The value of a stable currency is rooted in public trust in the issuer (and trust in the relevant regulator).

The description in the Libra white paper belongs to the second model, whose value is linked to a basket of French and/or French currency assets (national debt), but Facebook has changed its tone for regulatory approval. Libra may simplify the design and issue a single legal currency. The stable currency, the first stabilization mechanism. The value of the basket assets may fluctuate and the issuer may need to increase the assets in the basket or recover the stable currency from the market and destroy it to maintain the stability of the stable currency value. In order to reduce the fluctuation of the value of the basket assets, the issuer may set certain access conditions for the assets in the basket in terms of liquidity, market depth, credit level and concentration. These operations are very similar to the collateral management framework in the central bank's currency issuance mechanism.

Stabilized coin example

Stabilizing coins can be distinguished by high-level users and exchange rate policies. The term "retail" is used to refer to a stable currency for anyone, such as Libra, while "wholesale" refers to a stable currency with limited access, usually limited to a specific customer of a financial institution or financial institution.

Exchange rate policies can be fixed or variable. The wholesale stable currency that belongs to the depositary receipt model is a token representation of the issuer's underlying liability (customer deposit) and therefore has fixed exchange rates such as Signet, JPM Coin and USC. Other stable currencies, even those claiming 100% supported by a single currency, may fluctuate relative to the currency, such as Tether, TrustTokens, Paxos and Libra.

To date, only two types of stable coins have been observed: wholesale stable currencies with fixed exchange rates and retail stable currencies with variable exchange rates.

Stabilizing the currency ecosystem

A typical stable coin ecosystem consists of three core functions: stable currency issuance, redemption, and value stability; transfer between users; interaction with users (ie, user interface). Issuance and stability usually require a central governance entity to manage the stability mechanism, and the transfer between users is usually controlled by the Distributed Leger Technology (DLT) protocol.

Public policy, monitoring and management challenges and risks

From the perspective of public policy, supervision and management, stable currency presents a range of potential challenges and risks. Some risks—for example, about the security and efficiency of payment systems, money laundering and terrorism financing, consumer/investor protection, and data protection—are familiar, at least in part, within existing management and oversight frameworks. However, given the nature of certain stable currencies, their implementation and implementation may involve additional complexity. Stable currency arrangements should meet the same standards and comply with the same stringent requirements as traditional payment systems, payment plans or payment service providers (ie the same activities, the same risks, the same regulations). In addition, some of the economic characteristics of stable currency arrangements are similar to payment systems, ETFs, money market funds (MMFs), and traditional banking activities that may help to understand the possible risks of stabilizing currency functions.

The G7 report points out nine risks of stabilizing coins, but implicitly reflects different priorities.

Financial integrity – "three anti"

The entities that stabilize the currency and its ecology must meet Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and Countering the Financing of the Proliferation Of weapons of mass destruction: CPF) is the highest international standard. The Financial Action Task Force (FATF) is the AML / CFT / CPF International Standards Development Body. The FATF provides a strong and comprehensive framework to combat money laundering, terrorist financing, financing diffusion and other illegal financial countries, financial institutions and designated non-financial businesses and industries. The G7 report not only supports the FATF framework, but also requires G7 countries to “by example” to implement the revised FATF standards related to virtual assets quickly and effectively.

The president of Crypto Capital, known as the “central bank” in the field of cryptocurrency on October 24, was arrested by Polish police for allegedly laundering money for Colombian drug trafficking groups.

Data protection

As more and more data is collected and used to provide financial services and the development of machine learning and artificial intelligence technologies, policy issues surrounding personal and financial data protection and privacy will become increasingly important. Data policies are difficult to coordinate across borders, especially across jurisdictions and different cultures of data protection and privacy. In 2019, Japan assumed the presidency of the G20, confirming the importance of establishing global standards on how to define, protect, store, exchange and trade data.

The characteristics of the stable currency in terms of data privacy may significantly affect its acceptance. For example, senior EU officials have blocked Libra's operations in European countries on the grounds that Facebook has a bad record of abusing user privacy data. The cultural outlook of different countries also significantly affects the attitudes of governments and companies in terms of data privacy and brings about significantly different business outcomes. The negative case comes from Chinese Internet companies. Baidu CEO Li Yanhong has publicly expressed that “Chinese users are willing to use privacy for convenience” to defend their business model. Since the EU issued the General Data Protection Regulation (GDPR) in June 2018, China’s largest social platform WeChat Directly exited European operations. The positive case is also from China. In the past few years, China's big data industry has been following the "technical and financial innovation" high-cap crazy expansion to climb, process, process and sell Internet user information as the core business model. This madness may be terminated by the Chinese government's accelerated launch of the "Personal Financial Information (Data) Protection Trial Method." Considering that the Chinese government is currently launching a high-profile central bank digital currency DC/EP, it will use the thunder to reverse the abuse of data privacy by Chinese companies and the courage to cure the “cultural view” of responsible data privacy protection in China. Global promotion of DC/EP to help the internationalization of the RMB is an important prerequisite. Otherwise, other countries can defeat China’s efforts in the central bank’s digital currency by attacking the soft underbelly of user data privacy protection.

Legal certainty

Establishing a sound, clear and transparent legal basis in all relevant jurisdictions is a prerequisite for any stable currency arrangement. The underlying technology and contractual arrangements for stable currencies may vary significantly, and the applicable legal system depends primarily on the specific design and characteristics. The ambiguity of rights and obligations may make stable currency arrangements vulnerable to loss of trust (affecting financial stability). If value stability depends on market mechanisms, then the market broker's legal obligations must be defined to ensure that liquidity is always available to all customers.

For example, the stability of most stable currency values ​​depends on market makers (mainly major crypto-equity exchanges), but their white papers do not have any terms related to market-making obligations. In addition, the stability of the stable currency in extreme cases cannot be met by the market-making mechanism alone. When the price of the stable currency is seriously below the benchmark, the market makers have no incentive to provide liquidity to the market because they lack confidence in the return of stable currency prices. In this case, the stable currency issuer needs additional mechanisms to ensure the return of stable currency prices, such as the use of own funds (such as historically accumulated undistributed profits) or through the issuance of bonds to repurchase excess liquidity in the market. Sexuality, which is very close to the requirement of the Bank's overall ability to absorb losses as defined by the Basel III Agreement. A reasonable stable currency design needs to include a similar issuer's internal bail-in mechanism.

It is necessary to determine which jurisdiction's laws apply to the various elements of the overall design, and which jurisdiction's courts have the ability to resolve disputes, so specific issues may arise in cross-jurisdictional situations. Legal conflicts may also arise in view of the different treatments in different jurisdictions. In some jurisdictions, applicable financial sector laws may not keep up with new business models and market activities associated with stable currencies.

The ambiguous legal structure between the stable currency issuer Tether and the crypto asset exchange Bitfinex (two independent companies with the same group of executives) has caused widespread criticism. The New York Attorney General Office (NYAGO) wants to sue Tether because it believes that Bitfinex lost $850 million and then used its secret money with the associated stable currency operator Tether to make up for this huge loss. Bitfinex first questioned NYAGO's lack of jurisdiction and later denied the allegations.

Perfect governance

The governance structure of the stable currency must also be clearly defined and communicated to all ecosystem participants. Stabilizing coins that rely on intermediaries and third parties should be able to review and control the risks they bear from other entities and the risks they bring to other entities.

In the case of using DLT in a stable currency, it is necessary to carefully define the responsibilities and obligations as well as the recovery process. In the case of an unlicensed DLT system, sound governance can be particularly challenging, as decentralized systems that lack a responsible entity may not be able to meet regulatory requirements. On the other hand, a highly complex governance structure can hinder decisions on stable coin design and technology evolution, or can mitigate operational problem response.

If the reserve asset is not differentiated from the equity of the stable currency issuer, the issuer may abuse the investment policy to privatize the asset return, and the asset loss will be socialized to the token holder.

Market integrity

Market integrity means that stable currency must ensure fair and transparent pricing in primary and secondary markets, which is a key foundation for protecting investors and consumers and competition. In some designs, agents (such as designated market makers) may have significant market power and stable currency pricing capabilities, and may abuse the market.

Companies in the stable currency ecosystem may face conflicts of interest in a manner similar to what may occur with some existing cryptographic asset trading platforms. For example, they may be motivated to disclose false information about their activities, such as the number of customers and the volume of transactions, for advertising and other purposes. In addition, stable currency issuers may intentionally (or unintentionally) mislead customers about the key functions they perform, such as how they manage mortgage assets. These types of false information can lead to pricing errors and market failures. Since a single entity can play multiple roles in the ecosystem in ways that are not seen in other markets, such as market makers, trading platforms, and managed wallets, the risk and impact of market misconduct in that entity may be magnified.

The most popular stable currency USDT issuer Tether and the crypto asset exchange Bitfinex are independent entities but belong to the same controller, so the industry has been criticizing Tether/Bitfinex for manipulating bitcoin prices. Almost all Chinese-era crypto-equity exchanges also belong to a single entity that plays a role in asset trading, custody, market making, and wallet.

Consumer/investor protection

Given the complexity and novelty of stable currency arrangements, users (especially retail) may not fully understand the risks. Therefore, additional work may be required to ensure that all significant risks and their individual obligations are communicated to consumers and investors.

If there is unauthorized payment from a stable currency account, you should be clear about what rights the holder has to claim a refund and have a clear instruction on how to get a refund. As observed in the broader crypto asset market, the potential for misleading marketing and improper sales may exacerbate concerns about information and consumer understanding.

Payment system security, efficiency and integrity

Stable currency arrangements are expected to meet the same standards and comply with the same requirements as traditional payment systems, payment schemes, and payment service providers (ie, the same activities, the same risks, and the same management).

Network and other operational risk considerations

Public authorities will require the use of appropriate systems, policies, processes and controls to mitigate the operational and cyber risks posed by stable currencies. For example, some crypto asset wallets and trading platforms have proven vulnerable to fraud, theft or other network events. The structure of the distributed ledger system may also be compromised, potentially damaging the system. Moreover, new technologies may be subject to unidentified operational risks.

Tax compliance

Stabilizing coins, like other cryptographic assets, can present two types of challenges to tax administrations. First, the legal status of the stable currency is uncertain, so the tax treatment of trading with stable currency is uncertain. In addition, the stable currency can be regarded as a security, and a tax obligation is involved when the support value of the stable currency fluctuates against the legal currency. In this case, the stable currency of the redemption of the legal currency may be subject to tax. Different tax treatments across jurisdictions complicate the tax treatment of stable currencies.

The second challenge for tax administration authorities is that stabilizing coins (like other crypto assets) can also promote tax avoidance obligations. Jurisdictions can apply the terms and obligations of financial institutions to stabilize currency operators, but the lack of a central intermediary in the DLT system makes this difficult to implement. In addition, the degree of anonymity of the stable currency makes it difficult for authorities to track transactions and identify beneficiaries of stable currencies, making it more difficult to identify tax evasion.

Public Policy Challenges for Potential Global Stabilization Coins (GSCs)

Stabilized coins (such as Libra) from large technology platforms can scale quickly because of its established global customer base and interfaces that provide easy access to the platform. This arrangement is likely to become global, surpassing the challenges posed by small stable currencies, thus creating additional public policy challenges, including competition policy, financial stability, monetary policy transmission, and the long-term effects of the international monetary system.

Fair competition in financial markets

GSC arrangements may gain market dominance due to the strong network effects that initially prompted them to be adopted, the high fixed costs required to build large-scale business operations, and the exponential benefits of data access. GSC may affect market competition and a level playing field if the GSC arrangement is based on a proprietary system, as this may be used to prohibit others from entering or increasing barriers to entry into the system. This can happen if the company that dominates the stable currency arrangement controls the key channels that consumers and business users use to access a range of services.

Although there has not been a clear case of GSC that hinders fair competition in the market, the competition between China's two major technology companies' payment platforms and China's regulatory response is a close case. The Alipay's Alipay and the economic activity of Tencent's payment may be dwarfed by the economic volume of many countries. The two have in fact become information oligarchy, monopolizing the value of data acquired through their respective networks, and lacking interoperability with their peer-to-peer network platforms, creating a market fragmentation. However, the People’s Bank of China is responsible for the online payment and settlement of non-bank payment institutions by cutting off the channels of banks and all third-party payment service providers, and also resetting the account payment fees of Ant Financial and WeChat payments from commercial banks to the central bank. The cancellation of reserve interest and the increase in the reserve requirement from 20% to 100% significantly reduced the privilege and profitability of their monopoly data and effectively maintained the central bank's monetary authority.

Vulnerability within specific components of GSC

The mechanisms used to stabilize GSC values ​​need to incorporate high standards of financial risk management to address market, credit and liquidity risks. If the risk is not adequately addressed, this may undermine confidence and trigger a “swing” similar to bank deposits, in which case the user will attempt to redeem their GSC with reference.

Events that undermine the reputation of the GSC arrangement may result in a sudden flow of GSC sales. GSCs that rely on market makers to stabilize prices in open markets may be vulnerable if these market makers are not obligated to stabilize prices in all circumstances and may exit the market when GSC is under strong selling pressure. Even though GSC is committed to fulfilling redemptions, it is still vulnerable to compromises and leads to runs. Poor governance, such as non-independent funds in reserves, the issuer’s legal obligations are ambiguous or misunderstood, or the mechanism by which stable currency holders can realize or redeem value from issuers is weak, which may lead to GSCs Or the confidence level is impaired.

Reference assets, including bank deposits, may be exposed to the bank's credit risk and liquidity risk. Default or liquidity issues may mean that the GSC cannot meet the redemption requirements. GSCs holding a wide range of assets, such as bonds, may face market and liquidity risks of these assets and the issuer's credit risk. A decline in the value of reserve assets triggered by a particular change in overall market conditions or asset fundamentals may reduce the value of GSC. In addition, if the GSC has a nominal value, the reduced value of the reserve assets may result in a gap between nominal and reserve values. This gap may trigger a run, and users attempting to redeem the GSC's underlying assets may require the issuer to liquidate its assets below market value (firewire sales). GSCs with broader assets require liquidity arrangements to ensure that funds are available to redeem redemption even if the stable currency is under heavy selling pressure.

Although Libra claims a 100% reserve, its issuance represents a share of the underlying portfolio. The Libra Association will not deposit cash reserves in FDIC-covered commercial banks to earn interest because interest rates are too low (less than one in a thousand) and the FDIC does not provide a deposit insurance plan for an additional portion of more than $250,000, so there is a high probability that Put reserve assets into money market funds. It will face all of the above financial stability risks. The Libra Association claims to be close to the Hong Kong dollar currency board system. In contrast, the Hong Kong dollar currency issuance system can be examined. First, the Hong Kong dollar base currency issuance. In 2018, its reserve assets ratio is about 110%. The Hong Kong Gold Exchange Bureau’s Exchange Fund holds a large foreign exchange reserve of the Hong Kong government. The scale is close to 7 times that of the base currency and can be created almost when needed. Any amount of liquidity. Second, the HKEx provides a variety of facilities, such as strong/weak party exchange guarantees, discount windows, and final lenders, to establish reasonable expectations for the market and to obtain liquidity under all circumstances. As a stable currency, Libra lacks sufficient capacity to absorb losses like Hong Kong dollars and lacks professional tools to manage liquidity.

GSC can increase vulnerabilities in the broader financial system through several channels

First, if a user permanently holds a GSC in a deposit account, the bank's retail deposits may fall, and the bank has to rely more on more expensive and less volatile sources of funding, including wholesale financing. In basket currency countries, some of the deposits that flow out of the banking system (when retail customers purchase GSC) may return to domestic bank deposits and short-term government securities (through stable currency issuers). This means that some banks may receive more wholesale deposits from a stable currency issuer than a large number of retail depositors. Wholesale deposits are more sensitive to interest than retail deposits, so bank financing becomes more unstable and increases the bank's interest rate risk and operational risk, thus affecting the bank's ability to provide credit to the society.

Second, if the new financial intermediaries receive most of the financial intermediation activities in the GSC ecosystem, this may further reduce the bank's profitability, which may lead to banks taking on more risks or contracting loans to the real economy. This has the potential to particularly affect banks in smaller banks and non-basket currency countries.

Third, depending on the level of absorption, the purchase of safe assets for stable currencies may result in the lack of High Quality Liquidity Assets (HQLA) in certain markets, which may affect financial stability. HQLA generally comes from the bond market. A country's bond market is seriously lacking in depth. It may issue a small amount of government bonds (such as Australia) because of the government's good financial position, or it may be because the economy is small and the bond market is immature (as is the case in most small countries). If Libra's operations in these countries involve the purchase of large amounts of government bonds, this will result.

Fourth, in many countries, stable currencies linked to a basket of foreign exchange may be more stable than domestic currencies. Stabilizing coins connected to underlying assets or their claims may provide access to major (international) currencies and developed market assets, which are considered to be more stable than domestic currencies. Therefore, when domestic financial instability occurs, residents may flock to a specific GSC (similar to sudden dollarization). The transfer of a domestic bank account to a GSC arrangement that is primarily foreign assets (depending on where it is located) may result in capital outflows to the country. GSC trading speeds may be a welcome feature during normal times, but may be destructive during periods of turmoil. The authorities may lack the time needed to effectively intervene to stop this destructive process, and the GSC may act as a highway for capital outflows. This “digital dollarization” process is more rapid and more destructive than traditional dollarization, not only for countries with weak monetary systems, but also for economies with stable currencies, as long as the latter is economic or social. Open to the GSC. Libra is the GSC with this potential, which has caused a high degree of vigilance in almost all sovereign countries around the world, including EU member states and China.

Transfer risk to the real economy

If a GSC becomes a widely used means of payment, any damage to the payment may ultimately harm the real economy. If GSC is used as a means of settlement within the financial market, such delays may present additional financial stability risks. The impact will depend on the extent to which other payment systems (including cash) can be substituted.

If a GSC is used as a value store, and there is no bank account or a group with insufficient banking services as a form of savings account, any impact on GSC value has a wealth effect on its holder. This may have a greater impact on the economy as people adjust their spending plans accordingly. In addition, if there is a GSC-denominated loan, its value fluctuations will also have a balance sheet effect on the company.

If the value of GSC declines, banks and other financial institutions that are directly exposed to GSC (for example, because they hold GSC to serve their customers) may suffer losses. If there is no deposit insurance and last lender function, these intermediaries will be more susceptible to run. In addition, damage to these intermediaries may undermine confidence in the entire GSC system.

GSC's reserve assets may be large, which has a major impact on financial markets. Large-scale buying or selling of other assets (such as bonds) may affect the prices (and yields) of those markets. In extreme cases, when the GSC run occurs, if the issuer must quickly sell the assets to meet the redemption requirements, it may lead to the sale of the fire line and may undermine the financing of the custodian bank. Finally, at a time of stress, if a GSC provides a substitute for a legal currency, it may undermine monetary sovereignty.

The impact of monetary policy on domestic interest rates and credit conditions

If GSC is widely used as a value store, GSC-denominated assets will remain on the company's and household's balance sheets. In this case, the impact of domestic monetary policy may be weakened because it may have limited impact on the earnings of the assets held by GSC. This impact will depend on the design of the GSC and the scope of GSC holdings, and whether there are financial intermediaries denominated in GSC.

If the GSC pays (interest) returns, the impact of any interest rate on monetary policy transmission will depend on how the rate of return is determined. This benefit may reflect the return on assets in the reserve basket. In this case, if the national currency is the only asset in the basket (for example, Libra with a single legal currency), then the GSC holdings will equal the interest rate of the national currency deposit (possibly minus some fees). Therefore, if there is, the transmission of domestic monetary policy through interest rates may be less affected. Conversely, if there are multiple currencies in the basket, the return on the GSC may be the weighted average of the interest rate against the GSC reserve currency, which weakens the link between the domestic monetary policy and the GSC-denominated deposit rate. This is especially the case when the national currency is not included in the reserve asset basket at all, as is the case in most economies in the world.

In countries where the value of the local currency is unstable and the payment infrastructure is imperfect, the impact may be even greater. In these countries, GSC's peg to assets that are denominated in currencies other than the local currency may become a widely used payment and savings instrument, thereby undermining the effectiveness of monetary policy, even if GSC does not pay back. This will also result in a reduction in the central bank's seigniorage tax revenue (and government-related fiscal revenue). These effects will be similar to those observed in countries with reduced cash use due to dollarization. However, given the inability to discuss sovereignty over sovereignty over such alternative public policy implications, GSC currency substitution may have a different impact than foreign currency substitution (classic dollarization).

In addition, since domestic savers will be able to convert between local currency deposits and GSC holdings, the return of GSC may affect the amount of local currency deposits, thereby affecting the deposit and lending rates in the local currency financial system, thereby further weakening the monetary policy interest rate transmission mechanism. Effectiveness. This is similar to the effect that some countries have already achieved in dollarization, and may also occur in other countries that are not currently affected by dollarization.

In the above discussion, GSC is considered a form of savings, but the intermediary between the depositor and the borrower continues to operate in the local financial system in local currency. But there may be new intermediaries that borrow (or accept deposits) with the GSC and lend the money to the borrower (thus "creating" the currency). This will further weaken the transmission of domestic monetary policy, as the returns of domestic depositors and the interest rates paid by domestic borrowers will be slow to respond to monetary policy.

Considering that the current global central bank's benchmark interest rate is still at an appropriate level, other central banks generally have low interest rates or even negative interest rates. Therefore, Libra, which is linked to the US dollar, will directly weaken/enlarge the country's interest rate-based in all countries in which it may operate in the future. Monetary policy transmission mechanism.

Monetary Policy Transmission: Cross-border Transmission of International Capital Flow and Monetary Policy

By assisting cross-border payments, GSCs may increase cross-border capital liquidity and the substitutability of domestic and foreign assets, thereby expanding domestic interest rates' ability to respond to foreign interest rates and undermining domestic currency controls.

As long as trade continues to be denominated in conventional currencies, the use of GSC as an international means of payment does not necessarily change the response of international trade to exchange rates. However, if a GSC becomes an account unit for international trade and the trade is invoiced by the GSC, the international price denominated in the GSC may be more viscous. The terms of trade will then depend on the value of the GSC for the local currency and not on the bilateral exchange rate between the trading partners' local currency. Thus, the impact of exchange rates on trade and economic activity can be eliminated – a result similar to the results often attributed to the pricing of US dollar international trade.

If the GSC is widely used globally, the demand for those assets included in the reserve basket may increase in the long run. This could lead to capital outflows from non-reserve basket currencies and state capital inflows from reserve basket currencies. This may increase the market interest rate of the former country and lower the latter. As eligible collateral becomes scarce, any shortage of HQLA generated may undermine open market operations.

Legal, regulatory and supervisory framework applicable to GSCs

Public agencies must coordinate across agencies, departments, and jurisdictions to support responsible payment innovation while ensuring consistent GSC risk mitigation on a global scale. To this end, some international organizations and standards-setting bodies have issued guidelines, principles and regulatory standards. These include the Basel Committee on Banking Supervision's Code of Conduct on Encrypted Asset Risks, the Payment and Market Infrastructure Committee (CPMI) and the International Securities Commission (IOSCO) for financial market infrastructure principles for systemically important payment arrangements ( PFMI), as well as recent FATF recommendations for AML/CFT/CPF. Capital markets and banking regulations and standards may also apply to all aspects of stable currency arrangements.

FSBs and standards-setting bodies are intensifying their efforts to assess how their existing principles and standards can be applied to stable currencies and/or develop new policy recommendations to provide legal, supervisory and management of stable currencies in a globally consistent and coordinated manner. Guarantee.