On December 23, 2020, the U.S. President's Working Group on Financial Markets ("PWG") released a statement (the "Statement") providing an initial assessment on certain key regulatory and supervisory considerations for parties participating in significant digital asset arrangements that are designed to maintain a stable value relative to an identified fiat currency ("stablecoins").1 The Statement focuses on stablecoins having a nexus with the United States that are intended primarily for retail payments use. In this blogpost, we examine and summarize some of the key elements of the Statement.
The Statement begins with a supportive position encouraging responsible payments innovation. While recognizing the potential of digital payments to improve efficiencies, increase competition, lower costs and foster broader financial inclusion, the Statement notes the importance of the responsible design and operation of such innovations in manners that appropriately manage risk and maintain the stability of financial and monetary systems. The Statement also asserts that U.S. authorities will continue to assess the technological and market landscape as well as the regulatory framework for oversight of stablecoin arrangements to ensure responsible innovation while addressing risks to the financial system. Furthermore, the Statement suggests that authorities in the U.S. will pursue international collaboration, explore ways to strengthen information sharing across sectors and jurisdictions and engage in cooperative oversight arrangements.
Stablecoin Compliance Requirements
The Statement emphasizes the need for stablecoin arrangements to comply with the applicable US legal, regulatory and oversight requirements, noting the importance of risk consideration and management with respect to all stakeholders, particularly in stablecoin arrangements with greater potential scale, complexity and interconnectedness. Furthermore, a stablecoin arrangement will be expected to abide by the same requirements as arrangements performing the same functions or activities, and posing the same risks as the given stablecoin arrangement. Both a stablecoin's design and other factors could render the stablecoin a "security", "commodity" or "derivative", which will cause the stablecoin to be governed by U.S. securities laws, and/or the Commodity Exchange Act.2
The Statement also notes that stablecoin participants must meet applicable anti-money laundering ("AML") and sanctions legislation obligations. Similarly to Canada, such obligations in the U.S. include, but are not limited to, various registration, record-keeping and reporting requirements, and requirements to develop, implement and maintain AML and risk-based sanctions compliance programs.
Retail Payments Stablecoins
Where a stablecoin is predominantly used for retail payments and is adopted at a significant scale, the Statement notes that additional safeguards may be required. In the case of such stablecoins, the PWG encourages participants to align with seven key principles in the design, functionality, transactions and risk management:
- Financial Stability: This includes the integration of appropriate systems, controls and practices for risk management, including the safeguarding of reserve assets. The Statement includes guidelines for strong reserve management practices and for U.S. dollar-backed stablecoins.
- End User Protection This includes the provision of enforceable claims by holders against the issuer or reserve assets to exchange their stablecoins for the underlying fiat currency, as well as the disclosure of such right to the stablecoin holder. The Statement includes guidance for claims procedure risk mitigation, disclosure and error resolution processes.
- Market Integrity: This includes meeting AML and sanctions obligations, such as conducting identification and risk assessment of customers, transaction monitoring, records-provision to authorized parties, reporting of suspicious activity and screening for sanctions obligations.
- Operational Resilience: Stablecoin arrangements should ensure a high degree of security, operational reliability, which includes cybersecurity, business continuity management, adequate and scalable capacity, as well as data collection, storage and safeguarding mechanisms.
- Well-Functioning Payments and Trading Markets: This includes data management and safeguarding systems as well as reliable systems for the recording, retention and reporting of real-time data for dissemination to market participants.
- Macroeconomic and International Monetary Stability: This includes not undermining the domestic fiat currency, and, in the U.S., additional limitations on certain stablecoins.
- Comprehensive, Cross-Border Supervision: In cases where the stablecoin arrangement operates in multiple jurisdictions, the provision of necessary information and documentation to all relevant national authorities.
A number of these principles are similar to those set out in the Bank for International Settlements' report on stablecoins (the "BIS Report").
This guidance from the U.S. will be relevant to stablecoins having a nexus to the United States, such as, for example, stablecoins listed on any U.S. exchanges. Furthermore, similar regulatory considerations, including the need to ensure compliance with Canadian AML laws, sanctions laws and securities laws, will also apply in the Canadian context. Like in the U.S., Canadian stablecoins being used in the context of financial market infrastructures (such as for retail payments) may also trigger additional considerations and be subject to additional requirements. The guidance set out in the Statement may be instructive in this regard, particularly as, as noted both in the Statement and the BIS Report, there may be a need for further international collaboration and cross-border coordination going forward in this area.
1. The PWG Statement defines a "stablecoin arrangement" to include both the stablecoin, as well as the infrastructure and entities involved in developing, offering, trading, administering or redeeming the stablecoin.
2. Commodity Exchange Act of 1936 (US).
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