Stablecoin Faces Cloudy Future in Wake of G-7 Report's Concerns

Cryptocurrencies, until now, have operated in an unregulated Wild West market that has expanded amid major upheaval, financial scandals, bankruptcies and mounting skepticism over a lack of transparency in the nascent market. But now, that unregulated world is being reined in by policy makers and governments worldwide. A new G-7 report has outlined major concerns about stablecoins, a new class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset.

Specifically, the G-7 report outlined nine 'significant risks' posed by stablecoins as a group, from the potential for money laundering to tax compliance. In particular, the report said that company-created digital currencies, such as Facebook's Libra project, “pose challenges for competition and antitrust policies” and should not be launched until all legal and regulatory risks are addressed, according to the Financial Times. The report said that stablecoins such as Facebook's Libra that reach a global scale could “undermine competition in financial markets”, as well as threaten financial stability and monetary policy, per the FT.

The report suggested that other stablecoins now widely traded globally should also face more regulation and scrutiny. Stablecoins have gained traction as they attempt to offer the best of both world’s: the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.

End to 'Sandbox Approach'

The G-7 report's proposals are part of broader moves by U.S. and global authorities to regulate the overall cryptocurrency market, including not only stablecoins but also digital currencies such as Bitcoin. These virtual currencies have been a growing concern for policy makers focused on safeguarding financial stability, according to a story in Bloomberg. Central bank policy makers, who once lightly regulated emerging areas of the cryptocurrency market such as stablecoins, are now are taking a new approach. “Until recently, we’ve taken a sandbox approach to fintech regulation under which we could afford to give projects a chance and see how risks materialize,” said Benoit Coeure, economist and member of the ECB, before the G-7 announcement. “But now we have an elephant in the sandbox, so that approach doesn’t work anymore.” 

In this case, the “elephant” that Couere is talking about is the prospect of Facebook Inc.’s (FB) proposed Libra stablecoin entering the market. Facebook's Libra would give 2.4 billion users worldwide access to instant payments. That could give Facebook a huge advantage over leading stablecoins such as Tether. Tether’s trading volume has been as high as $21 billion per day and is another reason moves are being made to regulate the industry, according to Bloomberg.

What's Next

 Many of the G-7 proposals are likely to be considered by The Financial Stability Board, a group of regulators who spot vulnerabilities in the global financial system and initiate solutions. Their decisions are likely to affect not only stablecoins but the entire cryptocurrency market.