Babbitt Column | Is Global Stable Coin one step closer to birth? ——A Brief Comment on IOSCO's Stablecoin Supervision Suggestions

Author 's note : IOSCO 's public report on global stablecoins shows that the international community's exploration of global stablecoins has taken a small step in the direction of securities regulation. IOSCO is working with some international economic organizations to pave the way for the emergence of a compliant global stablecoin.

The emergence of the global stablecoin, that is, a stablecoin [1] with potential global influence, issued by the private sector (such as a large multinational technology company with a large user base) that can be used for domestic and cross-border payments and remittances, has triggered the international community. And regulatory considerations. The Libra plan announced by Facebook in June 2019 is a typical representative of the global stablecoin project.

The current new crown epidemic is sweeping the globe, but the research work on the global stablecoin risk survey and assessment by the international community has not stopped.

On March 23, 2020, the International Organization of Securities Commissions (IOSCO, one of the participants in the study of global stablecoin regulatory issues and regulatory policy recommendations ) released the Global Stablecoin Plan (the “IOSCO Report”) [2], From the perspective of securities regulation, assess which of IOSCO's existing principles and standards can and how can be applied to stablecoins (especially global stablecoins). Prior to this, the Group of Seven (G7) working group took the lead in conducting a preliminary investigation and assessment of the opportunities and challenges brought by global stablecoins, and in October 2019 formed the "Global Stablecoin Impact Survey Report" ("G7 Report ") [3]. After that, the Financial Stability Board (FSB) working group took the lead to take over the work of the G7 working group, and its joint financial action task force (FATF), the Committee on Payment and Market Infrastructure (CPMI), IOSCO and other international financial institutions and standard-setting organizations And other international organizations to conduct further research and assessments to develop regulatory policy recommendations.

Not surprisingly, the FSB will submit an advisory report on global stable currency regulatory issues to the Group of 20 (G20) finance ministers and central bank governors in the coming April. The relevant analysis and recommendations in the IOSCO report will be FSB The prepared consulting report provides a reference and will be reflected in the stable currency supervision policy recommendations finally formed by the international community.

I. IOSCO 's main work on the supervision of global stablecoins

According to relevant public information, in order to assess the risks and regulatory issues of the global stablecoin, IOSCO has mainly carried out the following work in less than one year:

(1) On October 30, 2019, IOSCO held a meeting in Madrid, Spain. One of the topics was to consider the risks and benefits attached to global stablecoins, and how the existing securities market regulatory rules should be applied to the regulation of stablecoins. ; [4]

(2) On November 4, 2019, the IOSCO Council issued a research statement on global stablecoins. [5] IOSCO stated in the statement that it has studied many stablecoins in 2019. IOSCO recognizes that stablecoins have potential benefits for market participants, investors and consumers, but also have various risks (including consumer rights protection, Market integrity, transparency, conflicts of interest, financial crimes, systemic risks, etc.). IOSCO Chairman Ashley Alder said in the statement that the global stablecoin may include some characteristics of some currently regulated securities, which means that some principles and standards of IOSCO may depend on the stability of the stablecoin. Structurally applicable; and

(3) On March 23, 2020, the IOSCO report was released. In response to the main problems and challenges of the global stablecoin mentioned in the G7 report, IOSCO considered the issue, redemption, and transfer of global stablecoins from the standpoint of the securities market regulator, using a hypothetical global stablecoin project as an example. And stability mechanisms, functions, their ecological participants, and the interrelationships and roles of the various components of the stablecoin. Based on this, relevant regulatory issues are raised, and the existing securities regulatory principles and standards are analyzed and how they apply to the world. Stablecoin and its ecosystem.

Example of Global Stablecoin

The IOSCO report does not define a stablecoin, but describes the four types of stablecoins that are common in the market today (i.e. stablecoins anchored to fiat currencies, stablecoins anchored to real world assets, stablecoins anchored to crypto assets, Algorithmic stablecoin). For the purpose of analysis, IOSCO proposed a hypothetical global stablecoin model without directly using Libra as an example.

In the global stablecoin project assumed by IOSCO, the issuer is a company that intends to design a platform that uses blockchain technology to issue stablecoins, which can be used for domestic and cross-border payments. Companies and third-party participants can provide goods or services on the platform to obtain stable coins, and the company hopes that third-party developers can develop other applications for stable coins.

The value of the stablecoin is linked to a basket of assets (“reserves”), which mainly include fiat currencies, bank deposits, and sovereign debt instruments, which are held in accounts opened by global financial institutions. The reserves are managed by the company in accordance with the policies formulated by the governance committee.

There is an Authorized Participant in the stablecoin ecosystem. The company will generate and redeem the stablecoin and trade with the reserve through the authorized participants to maintain the value stability and liquidity of the stablecoin. There are also crypto asset wallets that can be used to send, receive and store coins, as well as trading platforms that can trade stablecoins.

The author noticed that although IOSCO did not directly use Libra as an example for the analysis of regulatory application, from the background of its report and the design structure of the hypothetical stablecoin, the hypothetical project is very similar to the Libra project. Based on this, it can be speculated that the regulatory policy recommendations in the IOSCO report should be applicable to Libra and global stablecoins with a similar structure to Libra.

Applicable IOSCO regulatory principles and standards

Reading through the IOSCO report, IOSCO's regulatory policy recommendations for global stablecoins are very large and comprehensive, like a large net, which captures all aspects of global stablecoins and their ecology. Every participant, every link, and the interrelationship and role of each part can basically find similar supervision objects in the traditional securities market. Therefore, most of the existing supervision principles and standards can be applied by reference. In general, the existing securities regulatory principles and standards are not as tailored to global stablecoins, but they are generally applicable.

1.Stablecoin VS Financial Market Infrastructure ( FMIs )

In a hypothetical global stablecoin project, users can use stablecoins to pay domestically or across borders. Therefore, stablecoins may have systemically important payment system functions or other systemically important financial market infrastructure (FMI) functions. Relevant standards applicable to the Financial Market Infrastructure Principles (PFMI).

As the author mentioned in the article "Swiss Regulation of Stablecoins and Libra" ( https://www.8btc.com/article/482350 ), after the Libra plan was released, the Swiss Financial Market Supervisory Authority in 2019 The stablecoin guidelines were issued in November, stating that the Libra project may constitute a systemically important payment system, and that payment system licenses need to be obtained in accordance with the provisions of the Swiss Financial Market Infrastructure Act (FMIA), and relevant standards for PFMI will also apply.

It should be noted that IOSCO believes that although the PFMI standard is applicable to stablecoins in principle, there are still some problems in the specific application. For example, the legal qualifications and status of stablecoins in many jurisdictions are not clear, especially in partial decentralization. Under the decentralized or stable decentralized currency arrangement, its ecological participants are often distributed in multiple jurisdictions, which poses greater challenges to supervision.

2. Reserves vs Monetary Funds ( MMFs )

According to the different structural design and functions of the reserve, the rights and obligations of intermediaries (such as authorized participants) and the holders of the reserve, the reserve and the benefits and obligations related to the reserve are similar to different securities products (such as collective investment plans or other Form of securities).

In a hypothetical global stablecoin project, the structure of the stablecoin is similar to that of a monetary fund, such as: (a) Reserves include high-quality short-term government bond investments and bank deposits, which are similar to money funds that invest only in government bonds and short-term deposits Similar; (b) sell stablecoins to authorized participants in exchange for fiat currencies, and authorized participants will receive interest on reserves; and (c) authorize participants to redeem stablecoins in accordance with reserve requirements, a mechanism similar to a floating net worth currency fund .

Based on the above, IOSCO believes that in considering the regulation of global stablecoins, some of the policy recommendations in the "Policy Recommendation for Money Market Funds" report issued by IOSCO in 2012 can be applied as a reference.

3. Stablecoin vs. benchmark index

IOSCO points out that if the price of a stablecoin or its anchored asset value is used in the future as a pricing or pricing basis for certain financial instruments (such as funds, derivatives, etc.), the stablecoin or its anchored asset may constitute a benchmark index.

If the stablecoin or reserve fund meets the definition of the benchmark index, then according to the price mechanism of the stablecoin, the relevant principles in the Principles for Financial Benchmarks issued by IOSCO in 2013 may apply; You can also refer to relevant principles when evaluating stablecoins.

4. Stablecoin vs Commodity Derivatives

IOSCO pointed out that first, the stablecoin itself may be regarded as a derivative because its value comes from a package of financial assets (ie, reserves); second, future derivatives may also use the stablecoin as their underlying asset.

In view of this, when evaluating stablecoins, IOSCO's relevant regulatory principles on the commodity derivatives market can be referred to and applied.

5. Reserve VS Exchange Traded Fund ( ETF )

In the hypothetical global stablecoin project, authorized participants are used as intermediaries to conduct stablecoin and fiat currency transactions on reserves, create and redeem stablecoins, and provide liquidity for stablecoin holders. These roles and roles of authorized participants are similar to authorized participants in the traditional securities market to purchase and redeem ETFs and sell ETF shares to investors.

In view of this, if the structure of a global stablecoin is similar to that of an ETF, the principles of IOSCO's supervision of ETFs also apply.

6. Authorized participants, wallets vs traditional intermediaries

In IOSCO's view, because the digital wallet used in the stablecoin ecosystem has convenient payment and currency exchange functions, the wallet may play the role of an intermediary. Authorized participants are similar to the broker-dealers, investment banks, and trading platforms in the traditional capital market because of large amounts of fiat and stable currency transactions with reserves. In addition, the platform for trading stablecoins and the managers of stablecoins and reserves are also intermediaries.

Based on this, IOSCO believes that global stablecoin issuers and ecological participants may need to pay attention to IOSCO's relevant policy recommendations on the supervision of intermediaries (such as the IOSCO Principles for Market Intermediaries).

Necessity of cross-sectoral and cross-border regulatory cooperation

IOSCO believes that because global stablecoins generally have a large user base, a wide variety of ecological participants located in different countries, and can be used and circulated globally as a payment tool or other financial market infrastructure, it may affect The stability of specific countries and global financial markets has a significant impact. Under such circumstances, a single point of supervision by a single country and a single regulatory agency is difficult to achieve the effect of global risk prevention. It is necessary for securities regulatory agencies in each country to cooperate with other domestic regulatory agencies and cooperate with overseas counterparts and other regulatory agencies. .

IOSCO's existing principles on regulatory cooperation (such as establishing information sharing, exchanging public and non-public information with domestic and foreign regulatory authorities, and assisting foreign regulators in exercising their powers) can also be applied in the supervision of global stablecoins. Sovereign countries can cooperate by signing a memorandum of understanding to conduct cross-border coordination and supervision of stablecoins.

In addition, IOSCO also mentioned that global stablecoins not only involve issues of securities regulation, but also issues such as personal data protection, network security, anti-money laundering and anti-terrorist financing, and risk prevention also require cross-sectoral and cross-border regulatory cooperation.

V. Impact on Global Stablecoin

Looking at the attitude of some sovereign countries and international organizations towards the global stablecoin in the international community, despite the opposition (such as France, Germany, etc.), it is the main theme to try to include supervision. Under the instructions of the G20, international organizations such as FSB, IOSCO, and CPMI are comprehensively assessing issues and risks, studying how existing real-world regulatory frameworks can be applied to global stablecoins, and how to establish new rules where current regulations are not effective.

Every step forward by the regulatory agency in the formulation of regulatory policies means that the legal obstacles to the creation of global stablecoins are a little less, and that global stablecoins are one step closer to being born (whether it is called Libra or not). When the consensus on regulatory policy recommendations is reached at the international level, some sovereign states have accordingly formulated their own regulatory rules, and cross-border regulatory coordination and cooperation relationships have been established between relevant countries, and a compliant global stablecoin can land. But this process is inevitable and long.

Once the global stablecoin regulatory framework is finally formed, and specific to a specific global stablecoin project, "the one who succeeds and the one who loses" is an inevitable destiny. Will Libra be born at that time, what will happen to the existing stablecoin projects, and how will the market structure of stablecoin change? Witness together.

Author: Zhang Ling, a partner at law firm Han

Disclaimer: This article only represents the personal opinions of the author and does not represent the opinions of the institution. The content of this article does not constitute legal advice and investment advice. If you need to reproduce or cite any content from this article, please indicate the author's name.

[1] The term “global stablecoin” used here combines the descriptions of G7, FSB, and IOSCO in relevant documents, and is not a legal definition (there is currently no legal definition).

[2] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD650.pdf

[3] https://www.bis.org/cpmi/publ/d187.pdf , for a detailed analysis of the risks and challenges of the global stablecoin in the G7 report, see Long Baitao's Digital Currency: From Slate Economy to Digital Economic Inheritance and Innovation ", Oriental Press, 2020.

[4] https://www.iosco.org/news/pdf/IOSCONEWS550.pdf

[5] https://www.iosco.org/news/pdf/IOSCONEWS550.pdf