IMF publishes fintech note on regulation of stablecoins

By John Bassilios and Georgia Francis

The International Monetary Fund has published a fintech note on regulating the crypto ecosystem, with a particular focus on stablecoins.

Fintech note

The IMF’s fintech notes provide practical advice to policymakers on topical issues. This particular fintech note focuses on the types of stablecoins that have a face value denominated in a monetary unit of account and backed by financial assets.  The note, titled Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements, explains the risks of these stablecoins and discusses what policymakers should consider when it comes to their regulation.

The IMF considers that stablecoins of this nature are particularly important as, while they are currently used as a means to access other crypto assets across exchange platforms, they have the potential, according to the IMF, to become a popular means of (cross border) payment, a store of value and, overall, more intertwined with the current financial system. It is for this reason that the IMF calls for robust regulatory frameworks and international standards to mitigate risks to the wider financial system, as we discuss below.

In terms of any existing regulatory guidelines that are applicable to stablecoin arrangements, the fintech note makes repeated reference to the published guidance from the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) on how their Principles for Financial Market Infrastructures might be relevant for systemic stablecoin arrangements. We have written about CPMI and IOSCO’s guidance in our earlier update.

Key risks

The IMF considered that the following factors are indicative of the inherent risks stablecoins pose to the financial market:

  • the risk that the governance and management of the stablecoin arrangements pose (including decisions on composition of reserves, reserve custodians, and redemption) as there is no clear and universally accepted entity (usually these are tokenholders) responsible for governance, compliance and the management of risks.
  • the risk that the collateral assets underpinning the stablecoin could diminish in value, should fire sales need to occur in order for users to redeem their stablecoins quickly; in turn, affecting the broader financial market.
  • there is currently legal uncertainty surrounding the classification, rights and obligations of parties to a stablecoin arrangement.
  • clarity and transparency of the transfer or exchange function of stablecoins is blurred by software automation. Traditionally, identifiable entities are held responsible for decisions made by financial market institutions. However, for stablecoins such decisions are performed by smart contract technology. This means that in a stablecoin arrangement it is unclear which entity should be held accountable.

Suggested solutions

The fintech note considers that the solution to mitigate the risks associated with stablecoins as well as provide a sound regulatory framework can be achieved through implementing cross-sector co-ordinated standards, strengthening governance and putting in place an appropriate licensing regime.

Call for cross-sector coordinated standards

Comprehensive, consistent and coordinated global standards are required for stablecoins and their broader ecosystem and are essential to achieve an effective regulatory framework for the crypto asset market. The IMF considers that the Financial Stability Board (FSB) is the most suitable body to develop these standards.

Strengthening governance

Stablecoin arrangements should have identifiable decision-making and governance structures that are transparent and promote safety and efficiency of the arrangement. The governance structure should outline the lines of responsibility and accountability as well as documenting decision-making processes.

Implementing a licensing regime

A licensing regime should apply to the entities involved in the transfer function of stablecoins. Registration or licensing allows the collection of information and data necessary for proper supervision and oversight and for monitoring potential financial stability risks while protecting individual user privacy. Such approaches should include prudential requirements (such as initial capital and own-funds requirements) proportionate to the operational and financial risks faced by such entities in the course of their business.

The entity applying for licensing should comply with conditions to implement:

  • measures to safeguard payments to service the customer’s funds;
  • procedures to monitor, handle, report, and follow up on security breaches;
  • processes to file, monitor and track, sensitive payment data;
  • business continuity arrangements and contingency plans;
  • security policy;
  • risk-management and mitigation framework; and
  • internal control mechanisms to comply with anti-money laundering obligations.

The European Union, very recently, introduced a world first crypto-asset licensing regime, which you can read more about in our article, ‘EU progresses Markets in Crypto-Assets bill’.

The below table provided in the fintech note summarises the IMF’s key policy objectives and recommendations on the prudential regulation of stablecoins within the broader crypto ecosystem.

Policy objectives Most salient risks Regulatory consideration
Financial stability
  • Run/liquidity risk
  • Interlink with wider financial sector and decentralised finance (DeFi)
  • Currency substitution and bank disintermediation
  • Prudential requirements to address mismatches
  • Concentration limits
  • Cross-border cooperation
  • Compliance with Principles for Financial Market Infrastructures (PFMI) (for designated and global stablecoin arrangements)
Consumer and investor
  • Misleading disclosures
  • Inappropriate use of client assets
  • Conflicts of interest
  • Use of leverage
  • Disclosure and audit requirements
  • Segregation of the reserve assets and restriction of the reuse of reserve assets
  • Implementation of International Organization of Securities Commissions (IOSCO) recommendations on crypto trading platforms
  • Limits or restrictions on the use of leverage
Operational and cyber-resilience
  • Operational failures
  • Cyberattacks
  • Requirements for the robustness, resilience and integrity of operating system
  • Segregation of the client’s private keys in cold wallets
  • Compliance with the PFMI, where applicable
Financial integrity
  • Anti-money laundering/combating the financing of terrorism (AML/CFT)
  • Adopt Financial Action Task Force standards
Embracing the potential of
stablecoins while managing
  • Lack of sufficient powers or scope of regulatory authorities
  • Lack of regulatory resources and expertise
  • Legislative change to empower regulators
  • Authorities to determine legal classification of stablecoins


John Bassilios

John Bassilios

Partner & Fintech and Blockchain Lead

John has broad experience in financial services, funds management, blockchain, crypto, web3 and corporate law.

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