‘Stablecoins,’ market fragmentation top areas on watch list for global financial stability

“Stablecoins” and market fragmentation are two key areas being closely watched for their impact on financial stability by the global umbrella group for financial regulators, the chairman of the group (and Federal Reserve vice chairman) said Thursday.

In remarks to the European Banking Federation’s European Banking Summit, Brussels, Belgium, Fed Vice Chair for Supervision Randal Quarles, also chairman of the international Financial Stability Board (FSB), said the issues of financial innovation and market fragmentation “have the potential to profoundly affect financial stability.”

Quarles said “stablecoins” – which he defined as a type of crypto-asset that attempts to address volatility by tying its value to conventional assets, such as the value of the U.S. dollar or “a basket of currencies” – bring a “potentially new scale and scope that the financial regulatory community must carefully consider.” He described Facebook’s proposed “Libra” digital currency as a stablecoin that significantly increased public attention to payment method.

“Although there is a small risk to financial stability today, there is no doubt the potential scale of stablecoins and other crypto-assets yet to emerge may pose regulatory challenges,” Quarles warned.

Right now, he said the G7 (the group of the seven countries in the world with the largest economies) is finishing a preliminary assessment of stablecoins. He noted that the G20 (the group of countries with the 20 largest economies) has asked the FSB to lead the work going forward, which he said the FSB is doing.

“This is an issue that can potentially affect every country in the world,” Quarles said. “We have already begun work to identify which regulations exist that apply to stablecoins in our jurisdictions, and once that assessment is complete, we will report to the G20 on any appropriate actions that need to be taken to ensure that financial stability is not negatively affected by their introduction.”

Regarding market fragmentation, the Fed governor said concerns are rising that globalization of financial markets may be slowing and differences in the regulatory requirements at the national level may be on the rise.

He acknowledged that, in some cases, market fragmentation may benefit financial stability. However, he noted that fragmentation may also bring about unintended negative consequences, such as increased opportunities for regulatory arbitrage and cumulatively higher regulatory burdens for financial firms.

“Over the past year, at the request of the G20, the FSB has been examining the different forms in which market fragmentation is manifest,” he said. “Following up on that, we recently held a workshop where FSB members met with representatives from the private sector and from academia to discuss the internal allocation of capital and liquidity by global financial institutions.”

He said the FSB is also following up in other areas, such as working with the International Organization of Securities Commissions (IOSCO) on issues related to deference and examining improved ways for regulatory and supervisory information sharing.

“Market fragmentation is an issue that will never disappear, and we will remain vigilant to ensure that it does not pose a threat to financial stability,” he said.

Speech by Vice Chair for Supervision Quarles on the Financial Stability Board at 10 years—looking back and looking ahead