Facebook’s proposal for its digital currency, Libra, was a wake-up call for international regulatory agencies, finance ministries and central bankers. All these actors recognized that the company’s reach across its three platforms had the potential to accelerate adoption of a global stablecoin to an unprecedented extent.
In a new paper from the Bank of International Settlements, three analysts have proposed that the novelty of Libra and other proposed global stablecoins demand that regulators reimagine the possibilities for monitoring and supervising their issuance and circulation.
Libra’s potential for rapid mass adoption across multiple jurisdictions would require authorities to develop dynamic and adaptable tools for supervision and enforcement, the analysts wrote. While challenging, they argued that the nature of the digital stablecoin can itself offer new enforcement mechanisms:
“Stablecoin proposals are one area where embedded supervision may work in practice. Information is a central function of regulation, both from the standpoint of enhancing market functioning and efficiency, and as from the standpoint of supervision, whether for purposes of market integrity, customer and investor protection, or prudential supervision.”
This “embedded supervision” would make a direct and automated data reporting provision a registration requirement for all prospective stablecoin issuers.
As the analysts point out, this is already the case for some existing non-stablecoin digital payment platforms such as AliPay and WeChat Pay in China.
Stablecoins that use distributed ledger technology can generate secure information and support automated monitoring of the ledger, reducing the need for issuers to actively collect, verify and report data to public authorities.
Broadly speaking, there are three aims of introducing embedded supervision for stablecoins: reducing the costs of compliance, thereby leveling the playing field for large and smaller private actors; developing an open-source suite of monitoring tools that can clarify how regulatory frameworks can be applied; and ensuring the legal finality of payments, which remains distinct from economic and contractual finality.
After a careful analysis of the various challenges presented by this model, the authors argue that a better solution could, ultimately, be to embed fiat currencies within a similar paradigm.
Central bank digital currencies, or CBDCs, would not present the same “conflicts of interest” that privately-issued stablecoins represent. The authors therefore conclude with the suggestion that stablecoins may be an experimental proposal that points the way to innovation within the existing system, not beyond it:
“In the same way that stablecoins from previous centuries […] were an evolutionary step on the road to central banking, today’s stablecoins could too eventually give way to other reforms. This may include robust sovereign-backed alternatives and new means to connect central bank money across borders.”