03 December 2019

VoxEU: Stabilising stablecoins - a pragmatic regulatory approach

Policymakers are concerned about the stability of private digital currencies and protecting the consumers who use them. This column proposes locking stablecoins into an ETF-like structure with restrictions on basket composition. Stablecoin providers would be functionally similar to ETF sponsors, and stablecoins would become a new vehicle for traditional fiat currencies.

 

Luciano Somoza and Tammaro Terracciano propose to regulate stablecoins under a new ETF-like asset class. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck, and their argument that stablecoins function with an ETF-like structure is the key point of our proposal. ETFs and Libra share the same economic structure, and this should be the baseline for regulatory scrutiny because similar risks should be regulated in the same way (FINMA 2019).  

This regulation would bind stablecoins to an ETF-like structure, with full backing, token convertibility, a primary market with authorised participants, third-party custodians, and full disclosure of the underlying basket. Stablecoin sponsors should also be required to collaborate with the regulator to with the regulator to develop orderly liquidation plans. Regulation would turn stablecoin sponsors into a specific kind of ETF sponsor, reducing uncertainty around their business model. 

Further regulation is needed to allow tokens to be traded freely and easily by retailers. In particular, it would be reasonable to constrain stablecoins to include only risk-free securities and deposits in their basket, avoiding excessive financial risks for the financially unsophisticated retailers who might use them as a means of payment. 

For most digital currencies, users possess their own keys. This allows them to store their tokens physically (for example, on a USB stick) and to move them anonymously. This clearly poses huge capital flight risks, or the danger they can be used to support criminal activity. Therefore, we propose that users who want to dispose of their tokens always pass through a certified institution (maybe using a mobile application) 

Finally, when the regulator expects the launch of a stablecoin to have a large impact (Libra is a good example here), it could impose a step-by-step introduction. The sponsor and the regulator would preventively agree on temporarily constraints on the basket, such as picking shorter maturities or imposing a higher share of deposits. Something similar already happens in the ETF industry.

Full article on VoxEU

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