Does IOSCO, BIS exclude systemic stablecoin guidelines public blockchain? – Ledger Insights

Today, IOSCO, the international association of securities regulators, and BIS published a report on systemic stable coins. Aside from repeating that “same risks, same rules” must apply, it provides guidance for identifying whether a stack coin is systemic. And the bar is quite high.

The thesis also addresses some specific issues. Our reading of the management guide is that it makes blockchains with permission preferable, but we are not clear if public blockchains are impossible.

Systemic stable coins must comply with the principles of financial market infrastructure (PFMI), a list of rules that the largest financial institutions follow. And today’s guide suggests how these can be used stable coins.

Stablecoin management

One of the most challenging problems is management. And this is where you can see why the now abandoned Libra / Diem initiative went over to a permitted blockchain.

The guide says that there must be human responsibility, so the stablecoin event must be owned and operated by one or more identifiable legal entities.

For any systemic stablecoin scheme, it must be possible to have timely human intervention in a crisis. Keep in mind that today the significant stable coins are operated through smart contracts on public blockchains. The IOSCO guide considers immutable smart contracts to be inflexible in a crisis because it is simply impossible to address all contingency codes. They have a point. However, there are a few reservations.

The challenge is how to deal with this. The paper says that the algorithm must be able to be adjusted as needed. It does not go into detail, and raises the question of whether it is viable on public blockchains.

On a permitted blockchain, it’s easy. You contact the operators of the nodes and ask them to upgrade. Again, shades of Diem.

But in fact you CAN change a smart contract on a public blockchain. The concept of upgradeable smart contracts was created to solve this type of problem. Not so much in an emergency, but simply to upgrade them. If you are curious, there are some technical details here and here.

Whether you want to change a smart contract on a public blockchain at short notice is a completely different matter. We hear daily how hackers detect errors in smart contract code that allow them to steal money. It is a good thing that smart contracts are only updated occasionally on public blockchains. Because they really need to be match tested and revised. If you are talking about a systemic stablecoin, then even more.

But the second question is related to governance. The paper states that stack coin management must allow timely human intervention. In other words, there is no time to consult some decentralized management mechanism. Management must make quick decisions. It is, of course, the antithesis of the public blockchain. But let’s face it, all fiat-backed stack coins are completely centralized.

An even more difficult issue is that the IOSCO guide observes that in today’s stablecoins, some aspects are out of the control of the stablecoin issuer. Like the operation of the blockchain. This is where it is unclear whether they exclude public blockchains in the section below:

“SA’s (stablecoin arrangements) ownership structure and operation enable SA to comply with principle 2 (management) and the other relevant principles of PFMI independent of the management arrangements for other interdependent functions. “

New stablecoin features

There is much more to analyze, but move on. The BIS / IOSCO paper compares stack coins with other financial market infrastructures (FMIs) and finds that stack coins have four new features. Settlement does not take place through central bank or commercial bank money. There is greater interdependence between different stablecoin features. In fact, some of these features, such as issuance, redemption and stabilization, are new in themselves. Control and operation can be decentralized. And stablecoins use new technologies such as blockchain or DLT.

No systemic stack coins yet

In a speech yesterday, Sir Jon Cunliffe observed that no current stack coins are in line with PFMI. Cunliffe is chair of the BIS Committee on Payments and Market Infrastructures (CPMI) and deputy chair of the Bank of England.

Based on today’s paper, we will also conclude that no current stablecoin will be considered systemic.

“Recent developments in the cryptocurrency market have again led to an urgency for the authorities to address the potential risk posed by cryptocurrencies, including stablecoins more broadly,” Cunliffe said today. “They emphasize how quickly trust can be eroded and how

volatile cryptocurrencies can be. Such incidents may become systemic in the future. ” And he highlighted growing links to traditional finance.