BCBS – CPMI and IOSCO publish guidance, call for comments on stablecoin arrangements

October 6, 2021 – CPMI and IOSCO published guidance, called for comments on stablecoin arrangements.

Background: In 2019, Group of 7 and FSB did work on impact of global stablecoin arrangements, made recommendations for their regulation, supervision, and oversight. CPMI and IOSCO analysis as part of October 2020 report found the PFMI apply to stablecoin arrangements that perform systemically important payment system functions.

Overview: Consultation contains preliminary guidance to confirm, clarify stablecoin arrangements should observe international standards for payment, clearing and settlement systems.Proposes guidance on how the Principles for Financial Market Infrastructures (PFMI) apply to the novel features of systematically important stablecoin arrangements (SAs). Report marks major progress in understanding implications of stablecoin arrangements for financial system and providing clear and practical guidance on standards to meet. Each jurisdiction retains prerogative to determine in its own context whether to allow stablecoin activity, if it does so, and SA is systemic, then the PFMI would also apply.

Governance: A systemically important SA should have appropriate governance arrangements. Ownership structure and its operation should allow for clear and direct lines of responsibility and accountability, allow SA to observe PFMI principle 2 and others.

Risk Management: Systemically important SA should regularly review material risks that FMI function bears from and poses to other SA functions, entities performing other SA functions. SA should develop appropriate risk management frameworks, tools to address risks. Each SA should aim to identify and implement appropriate mitigations.

Settlement Finality: SA should provide clear and final settlement, regardless of operational method used.Clearly define point at which a transfer on ledger becomes irrevocable and technical settlement happens and make clear if there could be misalignment with legal finality. Ensure proper transparency re mechanisms for reconciling misalignment between technical settlement and legal finality, have measures to deal with related issues.

Money Settlements: Stablecoin used by systemically important SA for money settlements should have little or no credit or liquidity risk, should determine whether risks are strictly controlled. Includes relevant factors such as clarity and enforceability of legal claims, titles, other rights accorded to stablecoin holders, SA participants re issuer and assets backing it. Nature, sufficiency of reserve assets to support and stabilize value of outstanding stock of issued stablecoins, if reserve assets could be liquidated at prevailing market prices. Clarity, robustness, timeliness of process to convert stablecoin to other liquid assets, should be convertible into other liquid assets asap, at minimum by end of the day. Creditworthiness, capitalization, access to liquidity, and operational reliability of issuer of stablecoin, settlement account providers, and custodians of the reserve assets. Sufficiency of regulatory/supervisory framework that applies to all the parties, and existence of risk controls that could, where needed, reduce credit and/or liquidity risks.

Effectiveness: The closing date for comments on the consultation report is December 1, 2021. Some issues identified in report may need more clarification, future follow-up work.

For more information, visit www.bis.org.

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