• Pascal Sprenger, Partner |
  • Vanessa Dutzi, Expert |

Usage of physical payments continues to decline, and the future is digital with cashforms like the Stablecoin. With these new digital cash usages or digital coins,  regulatory challenges arose. RRP landscapes can provide the legal grounds to protect financial markets, institutions, consumers.

The future is digital:

We are using less and less physical cash for payments. And our world gets more and more globalized and digital. Therefore, it is not surprising that digital forms for payments already evolved and continue evolving. They become a part of our daily life as some digital forms offer more handy and new(er) ways of transacting, investing and storing funds.

The Stablecoin

The Stablecoin is one of these new digital forms of money, which is considered as: 

  • a bridge between traditional finance and the cryptosphere
  • a digital, “third medium” for money 
  • a new category of a regulated form of money.

The objective of the Stablecoin is to establish a “crypto-asset that maintains a stable value relative to a specific asset, or a pool or basket of assets”. Therefore, it is designed with a “stabilisation mechanism” to minimize major fluctuations in value and to address the high volatility of “traditional” crypto-assets by tying its value to the Stablecoin's underlying(s). This is of great importantance to certain investors who would like to invest in crypto-assets but fear the high volatility of traditional crypto-assets, such as for example seen in the Bitcoin. 

Recovery and Resolution Planning (RRP)

Recovery and Resolution Planning (RRP) has the purpose to strengthen the confidence in the financial market, its systems and to ensure financial stability without causing taxpayers to lose their money. This importance can again be seen on the latest FINMA resolution report 2022. RRP provides a legal, regulatory regime/framework spanned over financial market infrastructures (FMIs). 

RRP for Stablecoins:

RRP for Stablecoins needs to address the full ecosystem of a Stablecoin's payment system consisting of i.a. a Stablecoin issuer, the reserve system as well as the designated dealers. 
The Stablecoin's business model, dependent on the respective national legislation – here, on the example of Switzerland – needs for the case of systemic relevance to maintain and provide to the regulator the following plans: Recovery plan, Emergency plan, Resolution plan and Solvent-wind down plan. These plans together help Stablecoins and their payment system/business to 

  • stabelize itself in case of stress events (Recovery Plan), 
  • continue its systemic relevant business parts during stressing events/crisis (Emergency Plan), 
  • recapitalize/restructure and/or resolve parts/all of the Stablecoin's business (Resolution Plan) 
  • exit the market on a voluntary and/or forced basis (Solvent Wind-Down Plan).

Challenges

With the growing new FinTech-driven non-bank payment system providers that enable opportunities also arise new risks and challenges for financial stability, consumers, investors and regulations. 

There are inherent and related risks – in particular operational risks including cyberattacks – that need appropriately to be taken care of. This is very difficult as the existing regulations are not there in detail to help support the businesses sufficiently. Therefore, the demand on globally harmonized regulation and recommendations is very high. Without these, providers struggle to set-up interoperable systems for Stablecoins` ecosystems.

Further, crossborder challenges exist for RRP for Stablecoins. This is espcially the case where functions are provided by different providers located in different jurisdictions. This is for example seen in the demanding efforts that have to be taken to combat money laundering and terrorist financing across multiple jurisdictions. 

And, there is the hurdle that there is no safety net for Stablecoins, no deposit insurance yet or other protection for users.

Outlook

When digital Stablecoins become widely used, accepted and issued:

  • by companies, 
  • incl. large technology platforms, 

with the capacity to scale up and grow rapidly, it could lead to the solution that dominant service providers align and cooperate to path the way through first and second wave systems. This could set the basis to be followed and adapted by other service providers to result in a more harmonized and standardized handling of RRP for Stablecoins. However, if the dominant service provider do not act in harmonized way this could lead to a great disparity in solutions between different providers weakening the trust of the public in Stablecoins.

Furthermore, RRP for Stablecoins is important as regularly practical usage/praxis leads to theory/regulations. Meaning that regulations can benefit and advance by e.g. clarifying outstanding questions and unsolved issues from practical adaption/usage of financial market infrastructures.

Recommended actions

Therefore, it will be imporant that major economies (such as Switzerland, EU, USA, UK) issue clear guidelines, recommendations and regulations on RRP for Stablecoins that are internationally congruent in particular in more depth, detail and clarity. In addition, a guarantee scheme related to RRP for Stablecoin would be recommendable to address the current lack of user protection. 

RRP is especially relevant for Stablecoin plannings and usage as  private issuers of Stablecoin need to be able to exit the market in a structured way without causing systemic disruption. Therefore, in order to do so, (the right) RRP frameworks and plans need to be set up for each individual Stablecoin business.

For full details, go to www.fs-verlag.de/rarb

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