The director of the Central Bank Research Institute warns of the global stablecoin risks and calls for the establishment of new regulatory standards.

Recently, the director of the Digital Currency Research Institute of the People's Bank of China conducted an in-depth analysis and elaboration on the impact of global stablecoins on the financial market, currency system, and social system at a financial summit.

The director of the research institute pointed out that global stablecoins pose risks to public policy and regulation in several areas, including legal certainty, governance, anti-money laundering, counter-terrorism financing, payment system security, market robustness, personal privacy protection, consumer rights protection, and tax compliance. He emphasized that if stablecoins expand globally, these challenges and risks will be further amplified, potentially leading to new issues.

In response to this viewpoint, the director conducted a detailed analysis from three perspectives:

First of all, the application of global stablecoins may undermine the fair competitive environment of financial markets. Since stablecoin issuers are usually large technology companies, network effects can lead to increased market concentration, thereby weakening market competition. At the same time, the closed ecosystem of stablecoins may raise market entry barriers.

Secondly, the global stablecoin ecosystem faces mismatches in credit, duration, and liquidity, as well as operational risks, which may exacerbate the vulnerability of the domestic monetary and financial sector and accelerate the cross-border spread of crises. The director pointed out that global stablecoins largely rely on the credibility of the operators, and once a risk event occurs, there is uncertainty regarding the ability to maintain the stability of the coin value. Furthermore, issues such as the opacity of collateral asset reserves, unclear definitions of related rights and obligations, and poor governance may also trigger the risk of a bank run.

Thirdly, if global stablecoins are widely used for payments, any system disruption could trigger financial market volatility and affect real economic activities. If used as a store of value, a decline in coin value could lead to a shrinkage of wealth for holders. At the same time, banks and financial institutions holding stablecoins would also suffer losses; due to the lack of deposit insurance and a lender of last resort mechanism, these institutions could face more severe losses in the event of a bank run. Furthermore, given the large scale of reserve assets for global stablecoins, in extreme cases, if issuing institutions are forced to sell assets to meet redemption demands, it could cause drastic fluctuations in financial market prices and even jeopardize the safety of custodial banks. When the market is under pressure, if stablecoins become an alternative to fiat currency, it would pose a threat to national currency sovereignty.

The director believes that the global stablecoin ecosystem as a whole should be regarded as a systemically important regulatory object. He suggested that global stablecoins should not be launched before addressing legal, regulatory, and risk control issues. He called for a comprehensive assessment of potential regulatory loopholes to regulate stablecoins to the highest standards and to establish new regulatory standards. The private sector must comply with international and national laws and regulations when developing stablecoins, meet the highest standards for regulation, governance structures, and risk management, clearly define the rights and obligations of participants regarding stablecoins, clearly define governance structures and investment rules, and fully disclose relevant information.

In response to the specific risks of global stablecoins, the director proposed some suggestions. He believes that the overall framework of global stablecoins can be classified as a payment system, while its issuance, custody, and trading links can be classified as deposit-taking institutions, ETFs, and money market funds, respectively, with the stablecoin itself being classified as electronic money.

Regarding the regulation of systemically important global stablecoins, the director pointed out that some existing international standards can be referenced. For example, principles for financial market infrastructures, virtual asset standards, anti-money laundering frameworks, prudential standards for banks' crypto asset exposures, rules for money market fund operations, principles for ETF trading, customer asset protection, regulation of crypto asset trading platforms, and cross-market cooperation, among others.