When the announcement was made that Facebook would be throwing its considerable influence behind launching a cryptocurrency stablecoin it was met with instant resistance from some of the world’s biggest authorities. This has, in many respects, almost halted the project entirely. The issue is that regulators, central banks, and governments do not like the idea of private entities ‘creating money.’
However, there are more stablecoins that exist in the world than just Libra, and yet they have not faced the same ire or scrutiny from these regulators. The likes of Tether and other coins — which have been exposed to be fully dollar-backed — have escaped the same level of criticism.
However, it appears that the G20 nations, at least, do have similar concerns over stablecoins, but it is their low level of adoption that has kept them off the radar thus far. This does bring up questions of what will happen when these coins do gain traction, and what the central banks are thinking with the emergence of Central Bank Digital Currencies (CBDC).
Recently, the G20’s Financial Stability Board (FSB) issued a comprehensive stablecoin study on presenting 10 recommendations to regulate them effectively. This was, no doubt, spurred by Facebook and Libra.
The regulation of stablecoins is, of course, important, but perhaps less so than traditional cryptocurrencies, or at least ICOs and new creations of valued tokens. Stablecoins are supposed to be backed by traditional values but the FSB report notes that existing financial rules generally apply to stablecoins as well, mirroring similar statements from US regulators.
Generally, the rules governing these coins are quite loose, in part because they are so global and fall under different countries and their regulations. Some of the recommendations centre on creating a flexible cross-border framework, so that stablecoins would not be able to play on the differences between each jurisdiction.
The threat of a stablecoin
The study from the FSB explains why stablecoins may become a threat. The concerns are largely related to their lack of adoption, as the researchers believe that even small deviations from their peg may have important financial implications in mainstream settings.
There were also significant worries about their infrastructure, with the reports stating that outages in payment from weak scalability may be dangerous if an economy relied on these coins.
However, the most important issue appears to be that of capital controls:
“During periods of stress, households in some countries might come to regard [stablecoins] as a safe store of value over existing fiat currencies and exacerbate destabilizing capital flows. Volatile capital flows can have a destabilizing effect on exchange rates and on domestic bank funding and intermediation,” the paper read.