The global regulatory effort on stablecoins is a lot more organised than we think.
by Edmund Yong
[From Part 2: Currency Act]
4. Who are the local regulators of stablecoins and will regulations be harmonized?
As primary regulators in Malaysia, the Securities Commission of Malaysia and Bank Negara Malaysia have been working very closely on matters that could affect the stability and efficiency of the financial and capital markets. Both agencies have established formal platform to consult and discuss amongst themselves legal, supervisory and regulatory issues including amendment to relevant laws and regulations, as well as, issuance of policy documents, standards and guidelines.
Therefore, the harmonization of approaches in regulating and supervising matters of common interest to both regulators may not be impossible as long as it is consistent with the laws under their respective administration and enforcement.
5. How do you think international government bodies will approach this?
Perhaps wisdom could be drawn from other international bodies which have diverse membership and members with different levels of development but yet their members are committed to work towards achieving common objectives.
One of such international body is the Paris-based Financial Action Task Force (FATF) – an intergovernmental organization that designs and promote policies and standards to combat financial crime. Recommendations by FATF target money laundering (ML), terrorism financing (TF), and other treat to global financial system.
As I see it, the journey to combat money ML and TF was a tedious but a rewarding one when member countries yielded to the common objectives with full commitment. FATF embraces “phase-in” approach in recommending global standards to combat ML and TF. Broadly, under the initial phase, one of the most important recommendation imposed on all members of FATF and FATF-styled regional bodies was to criminalize ML and TF in their respective jurisdiction. Subsequently, FATF focused on providing guidance and technical assistance to it members in implementing the global standards. Thereafter, under the “assessment phase” – members would be assessed on their respective compliance with and effectiveness of the FATF’s recommendations through a Mutual Evaluation Exercise (MEE).
The Mutual Evaluation Exercise would normally be conducted either solely or jointly by FATF and/or FATF-styled regional bodies periodically. Based on the Mutual Evaluation Report prepared by the assessing team, FATF and FATF-styled bodies would monitor the implementation of action plans to rectify the deficiencies identified in the Mutual Evaluation Report.
As in other countries, Malaysia set up a 15-members High Level National Coordinating Committee on Anti Money Laundering and Terrorism Financing (NCC). The NCC is chaired by Bank Negara Malaysia and members comprising government ministries, supervisory and regulatory authorities, and law enforcement agencies.
As with the above experience of FATF, FSB’s Principles for Financial Market Infrastructures (PFMI) standards for stablecoin arrangements would be a good starting point and basis for all jurisdictions to work towards achieving the common objective of having a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities. Taking into consideration of potential domestic challenges that would be faced by some jurisdictions in adopting and implementing that principle, perhaps it is desirable for governing body of the FSB to consider granting some flexibility for members (with regard to an agreed timeframe) to fully implement and comply with FSB’s principles. I foresee a lot of time need to be spent on rounds of consultation, negotiations, and providing capacity building (on legal and technical infrastructure) with and amongst like-minded countries.
In my mind, active involvement and commitment of the government, its agencies and relevant primary regulators are of paramount importance from the very beginning of the mission to implement any global standards, without which, I am afraid it may not be a successful venture to the highest degree.
6.What should potential issuers of stablecoins look out for?
On a cautious, but prudent approach, potential issuers must be prepared to take the risks of entering a market that highly likely would be regulated (if it is not already so) – be it on incremental basis or big bang approach by the relevant regulators and supervisors in their respective jurisdiction.
One may recall that in one jurisdiction in Asia, its mobile banking business started off without much expectation to succeed. Many stakeholders in that jurisdiction were not confident that the newly introduced mobile banking business would take off and succeed in big way. However, that business, which started as an unregulated business began to grow exponentially. The successful venture was primarily due to the people’s readiness to change, adopt and embrace the new technology in conducting their banking transactions seamlessly through mobile phones at their convenience.
We were made to understand that unprecedented exponential growth caught the relevant government agency and regulator in that jurisdiction by surprise and they started to regulate such business with the primary objectives to ensure public confidence in using the new technology is sustained at all time; it would not give rise to and pose risks of monetary and financial system instability; and affording fair protection to all users of the mobile banking channel.
I foresee the same scenario may apply to stablecoin if it becomes widely used or acceptable globally. The only difference is how soon and in what manner such business be allowed to nurture and flourish? Would the potential issuers have a say in it or would such decision be made by the government authorities? This remains to be seen.
The Harvard Business Review (May 2020) reasoned that stablecoins could be the next big thing in e-commerce. Three of the four criteria are in place — appropriate technology, consumer demand, and corporate champions. What remains is an “amenable regulatory environment” that will help stablecoins boost mass adoption, “succeed where its predecessors (like bitcoin) failed” and “remake the global economy”.
Regulators have definitely been busy on their part: The G7 Working Group on Stablecoins, from the Bank of International Settlements (BIS), mapped out the impact and critical issues for consideration in Oct 2019; this was not long after the European Central Bank (ECB) put out an Occasional Paper on it (Aug 2019). Subsequently, the International Organization of Securities Commission (IOSCO) published a report on global stablecoin initiatives in Mar 2020, advocating for the application of PFMI standards and upholding its three core objectives: protecting investors, ensuring that markets are fair, efficient and transparent, and reducing systemic risk. The Financial Stability Board (FSB) concurred with these recommendations in its consultative document (Apr 2020).
While stablecoins are unlikely to displace economies that have well-functioning payment systems and networks, it appears that regulators are highly vigilant this time; and are determined not to be sidelined like what happened during the ICO phenomenon.
Disclaimer: The information in this article should not be treated as advice and may not be applicable to you or your situation. You can refer to legal professionals in the credits below.
Credits: We are grateful to Jeremy Lee of Skrine for providing valuable feedback, and to Gan Ming Chiek of GLT Law for proofreading this article.
This is a community education piece for the members of Access Blockchain Industry Association and Bitcoin Malaysia.