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If the Financial Action Task Force (FATF) has its way, stablecoin payments networks will no longer be able to take a hands-off approach to knowing who their users are. In a July report to the G20, FATF suggested that "central developers and governance bodies of so-called stablecoins" should be treated either as financial institutions or as virtual asset service providers (VASPs). Hence, stablecoin platforms would probably have to abide by the FATF's Recommendation 10, which prohibits financial institutions from "keeping anonymous accounts or accounts in obviously fictitious names." Stablecoin platforms only currently apply customer due diligence to the small minority of users who purchase, sell and redeem stablecoins for fiat currency.

Latin American stablecoin issuer Anclap is expanding its Stellar-based stablecoin network by launching a new stablecoin in Peru. Pegged to the Peruvian sol (PEN), the new stablecoin is designed to enable instant transactions across Anclap's network, including conversions in other fiat currencies as well as any other digital asset. Called the "digital sol," the stablecoin is said to be 100% backed by local fiat currency and is available on the Stellar network to be integrated into any platform, and exchangeable against several foreign currencies, including Argentine peso, Brazilian real, US dollars and the euro.

"Even centralized stablecoins operate as software running on decentralized blockchains, and it's important to keep in mind that stablecoins involve layers of software that are not used in traditional financial institution activity. If this software doesn't operate safely and securely, or if the decentralized networks don't operate as expected, there could be a loss of confidence in the stablecoin or even outright theft. As it stands now, regulators, issuers, and users of a stablecoin need to understand stablecoin software and the underlying blockchain platforms they run on in order to accurately measure technical and operational risk."

"Without access to central bank payment rails, non-bank stablecoins will be perceived (however large the HQLA buffers they may propose) to be less safe than bank stablecoins. As most stablecoins are in US dollars, the US has an opportunity to exploit its (relatively) late entry into the stablecoins discussion. Allowing stablecoins from banks and non-banks chartered as banks to interoperate - not just by enabling both to have access to central bank payment systems, but also by enabling the use of public, open-source technology protocols that already interoperate with each other - will make a difference in the payments/settlements landscape."

The International Monetary Fund (IMF) published a Fintech Note that provides key elements that should feature in any stablecoin regulatory arrangement. Stablecoins have experienced periods of rapid growth, accelerated links with traditional finance. Without proper regulation, contagion risks to wider financial sector will increase. Global regulation for Stablecoins should be comprehensive, consistent, risk-based, flexible, and focus on their structural features and use. Requirements on Stablecoins should cover the entire ecosystem and all its key functions, and there should be additional oversight for systemic stablecoin arrangements. In markets where risks are growing quickly, authorities should take immediate action by using all the tools at their disposal. For effective implementation, domestic and international collaboration are key.

The Bank of England (BoE) published a discussion paper that sets out its proposed regulatory framework for systemic payment systems using sterling-denominated stablecoins and related service providers. It was published alongside a discussion paper from the Financial Conduct Authority (FCA) on their regulatory approach to stablecoin issuers and custodians, a letter from the Prudential Regulation Authority (PRA) to bank Chief Executive Officers on innovations in the use by banks of deposits, e-money and stablecoins, and a roadmap paper, which sets out how the various regimes interact together. Notably, the BoE discussion paper favors stablecoins fully backed by central bank deposits as the most appropriate for systemic payment systems using stablecoins.

"Stablecoins aren't stable. So-called algorithmic Stablecoins crash and burn when people behave in ways the algorithm didn't expect. And reserved Stablecoins fall off their pegs - in either direction. A stablecoin that does not stay on its peg is unstable. Not one of the Stablecoins currently in circulation lives up to its name. "

It's clear regulators prefer interacting with banks because banks are centralized and easy to control. Reading between the lines, the real risk stablecoins pose is creating a system less amenable to government efforts of control. But technological progress is not going to stop. Economic activity is simply going to move elsewhere in the world if we continue down this path. United States regulators believe they face a choice between allowing or banning stablecoins, but in reality they face a choice between allowing stablecoins onshore or having them be primarily offshore. Already, the biggest winner of the current U.S. attack on crypto is likely Tether, the largest stablecoin issuer with a less-than-reputable past. Stablecoin tether (USDT) is growing again while Circle's USDC and the Paxos-issued BUSD, both of which are more transparent, more regulated and safer for consumers, are shrinking.

This paper by Maarten van Oordt illustrates how fiat-backed/pegged stablecoin peg deviations may occur when the issuer doesn't have reliable access to the traditional payment system of the jurisdiction that issues the relevant fiat currency. It suggests that national authorities could make stablecoin issuer access to payment systems conditional on submitting to regulatory controls. Stablecoin users would then face a choice between regulated stablecoins with a stable value but little autonomy, and alternative stablecoin arrangements with more autonomy but a less stable value.

The U.S. House Financial Services Committee (FSC) published a draft version of a stablecoin bill, with proposals including a two-year moratorium on stablecoins backed by other cryptocurrencies and a request to study a central bank digital currency (CBDC). The draft puts the Federal Reserve in charge of non-bank stablecoin issuers, whereas insured depository institution issuers would fall under the appropriate federal banking agency supervision. Among the factors for approval is the ability of the applicant to maintain reserves backing the stablecoins with U.S. dollars or Federal Reserve notes, Treasury bills with a maturity of 90 days or less, repurchase agreements with a maturity of seven days or less backed by Treasury bills with a maturity of 90 days or less, and central bank reserve deposits. A subcommittee will hold a hearing on stablecoins on Wednesday, featuring Dante Disparte from USDC issuer Circle; the Blockchain Association's Jake Chervinsky; Columbia Professor Austin Campbell and New York Department of Financial Services Superintendent Adrienne Harris. https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408691

On January 4, 2021, the Chief Counsel of the Office of the Comptroller of the Currency ("OCC") issued an interpretive letter ("IL 1174") on the permissibility of national banks to use independent node verification networks ("INVN") and stablecoins for payment activities. In particular, "[n]ational banks … may use new technologies, including … stablecoins, to perform bank permissible activities, such as payment activities." The letter, when coupled with other OCC interpretations, now firmly places the issuance and use of stablecoins as permissible bank activities. While stablecoins may also be securities under certain circumstances, there is a well-defined line of case law, including from the Supreme Court, about the factors to apply when determining whether a product that has characteristics of both a banking product and a security is one or the other (or both). Therefore, issuers and investors may now apply the age-old factors to bank-issued stablecoins and be comfortable about the regulatory characterization of the ultimate product.

The Bank of Canada [BoC] published a paper on the risks stablecoins could pose to the financial system. It argues that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader crypto-asset markets and the traditional financial sector. It also argues that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance (DeFi). Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, it explores the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy.

Issuers of stablecoins have thrived while nominal interest rates have been near zero. With high positive interest rates, the opportunity cost of holding zero-interest stablecoins increases and the issuers lose business. With significantly negative rates, the value of safe reserves declines but the tokens are still redeemable at par. Issuers face insolvency and must invest in riskier reserves for a chance to survive. If stablecoins are no longer fully backed by safe and liquid assets and are widely used, this creates financial stability risks. Suppose the issuers could pass on their interest earnings (or costs if rates are negative) on reserves to the token holders on a one-on-one basis. If interest rates are high, stablecoins are a competitive liquid store of value. If they are significantly negative, the issuers' liabilities shrink along with their reserve; the issuer remains solvent. stablecoins could be sustainable in all interest rate environments. There is a problem though, at least for the EU with the Regulation on Markets in Crypto-assets (MiCA) that is expected to come into force in 2024. This proscribes the paying of interest on money tokens. That would force issuers to adopt a business model that is only sustainable with near-zero interest rates.

Coin Metrics published an update on stablecoin market developments, concluding that the expanding supply of stablecoins serves as a clear indicator of rising activity and usage within the digital asset ecosystem, with Tether on Tron leading the charge. Despite challenges in the U.S. regulatory environment and a complex political landscape, stablecoin liquidity has shown impressive resilience. The update attributes this to the wide utility of stablecoins, through avenues such as decentralized finance (DeFi) pools to exchanges and in diverse yield generating products. These trends also evidence the central role stablecoins play in the crypto-economy.

Over the past month, stablecoins have lived up to their moniker and value proposition. We've seen a flight from traditional crypto assets to stablecoins similar to 2018. The market cap of all stablecoins has swelled from $5 billion at the start of the year to above $8 billion in April. And the improved stability and usability of stablecoins equips them to rise to the occasion and prove utility beyond demand from exchange arbitrage and safe haven appeal.

According to Coinmetrics, none of the major stablecoins became seriously unpegged during the May 19 crypto flash crash. As prices drop, investors often rush to trade their crypto-assets into stablecoins, while the liquidations can cause stablecoins being used as collateral to be sold. This sudden shift in supply and demand can potentially knock stablecoin prices from their $1 peg, and threaten their stability. Although I and some others observed some USD stablecoins below 90 cents on some trading screens, apparently none actually traded there.

Calibra's David Marcus told a banking seminar hosted by the Group of 30 in Washington that instead of having a synthetic unit...Libra could be a series of stablecoins: a dollar stablecoin, a euro stablecoin, a sterling pound stablecoin, etc.

"How long will regulators allow pseudonymous usage of stablecoins to continue? FATF regulations are supposed to be technology-neutral. So far FATF hasn't had much to say on stablecoins. But you can be sure that something is in the works, and it isn't likely to be good for stablecoin operators. The problem is that granting permissioned-pseudonymity to stablecoin operators contradict technology-neutrality. It sets one set of standards for bank accounts and another for stablecoins."

This paper overviews stablecoin stability mechanisms, the current stablecoin market landscape, and the performance of major stablecoins during the 2020 financial market crisis due to the COVID-19 pandemic. Results from this analysis indicate that stablecoins' performance during the financial crisis and, in particular, the market crash present a direct relation with their specific behavior attributed to different design aspects, including their popularity.

This Banco de España paper written by a couple of Bank for International Settlements staff discusses the regulatory challenges around stablecoins, and in particular potential "global stablecoins" such as Facebook's Libra proposal. It makes the point that any regulatory responses should take into account the potential of all stablecoin uses, including embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for "embedded supervision". Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could in fact provide more effective solutions to fulfil the functions that stablecoins are meant to address.