Stablecoins will not meet global standards, FSB warns
Stablecoins will not meet impending regulatory standards, the head of the Financial Stability Board (FSB) has warned.
These include USDC (USDC-USD) and USDT (USDT-USD), and are paired one-to-one with major currencies such as the dollar.
They underpin the crypto sector, and provide a relatively non-volatile parking lot for investor profits, as most cryptocurrencies can be traded for them.
Bank of England head of fintech Varun Paul told Yahoo Finance UK that commercial banks will soon start issuing their own pound- and dollar-backed stablecoins.
Alongside the central bank’s digital currencies, these innovations in the blockchain area may be about to be widely used.
Read more: Crypto: Will UK Banks Adopt CBDCs and Stablecoins?
However, the head of the FSB issued a statement on Monday issuing a strong warning to officials in global finance that existing stablecoins “do not meet international standards”.
The FSB, which is an advisory council affiliated with the Bank of International Settlements, is set to release its final recommendations on global regulation and oversight of crypto assets in July.
FSB head Klaas Knot, in a letter addressed to G20 finance ministers and central bank governors, said on Monday: “Importantly, the FSB’s work concludes that many existing stablecoins currently would not meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed Bank of International Settlements Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance.”
He added: “This year, the FSB will finalize its recommendations for the regulation, oversight and supervision of cryptoassets and markets and its recommendations targeting global stablecoin arrangements, which have characteristics that could make threats to financial stability more acute.”
The majority of crypto app users have lost their bitcoin holdings, BIS reports
The news comes after the Bank of International Settlements (BIS) said in a report that the majority of crypto app users have lost their bitcoin holdings over the past seven years due to events such as 2022’s collapse of the FTX exchange which saw $2tn ( £ 1.66bn) deleted from the crypto market.
On Monday, the BIS released an analysis of whether crypto investors made or lost money in the period from August 2015 to December 2022, when bitcoin’s (BTC-USD) price rose from $250 to $69,000, only to collapse to a low of $16,000 after FTX- bankruptcy in November 2022.
Check: Crypto live prices
Monday’s BIS bulletin found that when the 2022 collapses of Terra/Luna and FTX were taken into account, “the majority of crypto app users in almost all economies lost their bitcoin holdings”.
The implosion of several crypto entities in 2022 removed $2 billion from the cryptocurrency market cap and saw popular digital coins like bitcoin plummet well below 2021 highs. The majority of losses were felt by retail investors who had downloaded crypto exchange apps such as Coinbase (COIN), Binance and the now bankrupt FTX.
The BIS report looked at the number of users downloading crypto exchange apps and found that most of these downloads occurred when the price of bitcoin was above $20,000.
Read more: FTX bankruptcy causes 80,000 UK crypto investors to lose money
The report then estimates that retail investors are likely to buy at least $100 worth of bitcoin on the download date.
This led the BIS to conclude that “in almost all economies in our sample, a majority of investors probably lost money on their bitcoin investment.
“The median investor would have lost $431 by December 2022, equivalent to nearly half of their total $900 in funds invested since downloading the app.
“Notably, this proportion is even higher in several emerging market economies such as Brazil, India, Pakistan, Thailand and Turkey.”
The report questioned whether the 2022 crypto-euro posed any systemic risk to broader, traditional financial markets. It found that crypto shocks, such as those from FTX and Terra/Luna, have a limited impact on stock prices or broader economic conditions.
The report said there is a tenuous correlation at best between broader stress in the world of traditional finance and crypto losses.
Crypto enthusiasm shows no signs of abating
The BIS said that despite crypto’s high price volatility and the lack of significant real-world use cases, investment inflows from retail investors have increased.
The report added that crypto trading activity had increased markedly despite the collapse of the Terra/Luna algorithmic stablecoin in May and the FTX bankruptcy in November 2022.
It said: “The monthly average number of daily active users grew from around 100,000 to more than 30 million globally, during the rapid price increases in late 2017 and early 2021, around 100 million and 500 million new users joined.”
Read more: What is the digital pound and when can you expect it
The BIS said the increased market activity since the implosion of the Bahamian-based FTX cryptocurrency exchange was notable for a pattern of larger, more sophisticated investors selling and smaller retail investors buying.
“Nevertheless, despite crypto’s large user base and the significant losses for many investors, the 2022 market turmoil had little discernible impact on broader financial conditions outside the crypto universe, underscoring the largely self-referential nature of crypto as an asset class,” the BIS said.
The report described a pattern of user numbers increasing as the price of bitcoin rose, but that the influx of new investors was behind the rising price, suggesting that “users enter the system attracted by high prices and in the expectation that prices will keep going up”.
