G7 Leaders Call For Rapid Regulation of Stablecoins

G7 finance ministers have called for action to “monitor and address financial stability risks arising from all forms of cryptoassets.” Meeting in Germany, the group argued for the implementation of the Financial Action Task Force (FATF) travel rule, and stronger disclosure and regulatory reporting requirements. 

A particular focus of the statement was stablecoins, with the G7 stating that greater transparency is required around reserve asset backing for stablecoins: “We reaffirm that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to applicable standards.”

The recent collapse of stablecoin terrausd (UST), alongside cryptocurrency terra (LUNA), prompted India’s Central Bank Governor to issue a broad statement warning about the lack of regulation in the crypto sector. 

Financial Stability Board action

The G7 also highlighted ongoing work by the Financial Stability Board (FSB) to review the cryptocurrency space and foster global cooperation. The FSB issued a report in February 2022, which includes a section on stablecoin vulnerabilities. In it, the FSB argues there is a risk “that a stablecoin could launch and scale rapidly before… regulatory frameworks are in place.” More broadly, it highlights several areas for vigilance, including:

• Increasing bank sector involvement with cryptoassets
• An acceleration in the use of cryptoassets for payments
• Systemic risks created by growing regulatory arbitrage 
• A rapid growth in the wider DeFi ecosystem without supporting governance, regulatory and supervisory structures 

FATF virtual asset guidance

In the FATF’s revised virtual asset guidance, issued in October 2021, the standard setter highlighted the money laundering and terrorist financing (ML/TF) risks associated with stablecoins (pg 17). In alignment with the FSB, the FATF notes the “mass adoption” potential of stablecoins as an accelerant to the ML/TF risks they pose. The FATF also notes that “design choices” can have a significant impact on stablecoin risks – particularly the degree to which they are built in a centralized or decentralized way. Many of these points were also raised in an earlier G20 report on stablecoins issued in 2020, highlighting the persistence of many underlying stablecoin risks.

Crypto regulatory trajectories in Asia Pacific

Several major economies in Asia Pacific have been building and extending their AML/CFT programs over the last 12 months to better reflect the shifting crypto and stablecoin landscape. 

Australian regulator AUSTRAC announced in 2021 it was exploring how it could apply the FATF travel rule to crypto exchanges. In March 2022, the government launched a consultation on a proposed Digital Services Act (DSA) covering crypto custody, market licensing, taxation and decentralized autonomous organizations (DAO). Australia’s Labor government, elected in May 2022, has yet to confirm where and how it will take this legislation forward.

Singapore recently issued a significant new Financial Services and Markets (FSM) Bill, expanding the powers of the Monetary Authority of Singapore (MAS) to address crypto regulatory weaknesses. The act includes harmonized and expanded prohibition powers, enhanced digital token regulations, harmonized technology risk management requirements, and statutory protections for mediators. 

Finally in India, one of the world’s fastest growing crypto markets by adoption, the medium term regulatory landscape remains unclear. The country’s Cryptocurrency and Regulation of Official Digital Currency Bill remains delayed. While India’s Finance Minister recently highlighted the innovative potential of crypto, as the Central Bank Governor’s statement shows, there remains significant skepticism.