The Financial Stability Board has warned that many existing stablecoins would fail to pass muster under new risk management rules currently being formulated.
The events of the past year, such as the collapse of FTX, have highlighted the intrinsic volatility and structural vulnerabilities of crypto-assets, wrote FSB chair Klaas Knot in a letter to G20 finance ministers.
Emphasising the critical nature of regulatory oversight for the sector, Knot says: "We have now seen first-hand that the failure of a key intermediary in the crypto-asset ecosystem can quickly transmit risks to other parts of that ecosystem. And, if linkages to traditional finance grow, risks from crypto-asset markets could spill over onto the broader financial system."
Stablecoins are seen as an effective transmission mechanism for financial shocks that could make threats to financial stability more acute, says Knot.
The G20 has charged the FSB with coordinating the delivery of a comprehensive regulatory framework for crypto-assets which is expected to be completed later this year.
The recommendations for stablecoins include guidance to strengthen governance frameworks, clarify and strengthen the redemption rights and the need to maintain effective stabilisation mechanisms, among other revisions.
Concludes Knot: "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."
Last week, the Financial Stability Board said it was also stepping up its investigation into the opaque world of decentralised Finance (DeFi), once again fearful of the potential for spill over risks to traditional finance.