Most stablecoins won’t meet upcoming recommended standards, FSB says

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Most of the existing stablecoins won’t meet the upcoming recommended standards that the Financial Stability Board (FSB) will publish later this year, the Swiss organization has claimed.

In a letter to the G20 finance ministers this week, FSB chair Klaas Knot delved into the issues at the heart of global financial stability, with digital assets and decentralized finance among the key components.

Knot confirmed that the FSB would publish guidelines on regulating and supervising stablecoins. They include strengthening governance frameworks, clarifying redemption rights, and underlying the need for effective stabilization mechanisms.

“Importantly, the FSB’s work concludes that many existing stablecoins would not currently meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed BIS Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance,” Knot’s letter pointed out.

Knot, a Dutch economist currently serving as the President of the country’s central bank, De Nederlandsche Bank, believes digital assets pose a systemic risk to global financial stability. Last year’s events, such as the collapse of FTX, “highlighted the intrinsic volatility and structural vulnerabilities of crypto-assets,” he noted.

In response, FSB is working with the International Monetary Fund (IMF) on a joint paper that will delve into digital asset regulation.

Knot called on national and regional regulators to use the upcoming report to guide their work on regulating the sector, which he believes is “currently not compliant with applicable regulations.”

“Once the work is completed, the appropriate regulation of crypto-assets, based on the principle of ‘same activity, same risk, same regulation’ will provide the beginning of a strong basis for harnessing potential benefits associated with this form of financial innovation while containing its risks,” the FSB chair noted.

On DeFi, Knot believes there is a need for proactive monitoring by regulators.

The FSB recommendations come at a time when European countries are tightening stablecoin regulations, prompted by the short-lived rise of Diem, Facebook’s (NASDAQ: META) attempt at a stablecoin. This week, Israel’s central bank published new guidance on stablecoins and, among other things, banned algorithmic stablecoins.

Israel further requires all stablecoin issuers to fully collateralize their stablecoins.

“If, nevertheless, this type of currency becomes a common means of payment, issuers will be required to hold full collateral, and in fact the issuance of a bearer currency that uses an algorithmic stabilization mechanism will be prohibited,” the document, written in Hebrew, stated.

Watch: The Future of Digital Asset Exchanges & Investment