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Mind the [stablecoin] gap​​​​​

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Crypto assets were originally conceived as a payment system – enabling cheaper and faster movement of value because the underlying technology eliminates the need for intermediaries like banks. However, to date, stablecoins are not widely used as a means of payment outside of the crypto ecosystem.​ [1​​]

Ever since crypto assets like Bitcoin gained prominence, critics have argued that their volatility and 10-minute block time make them an inadequate payment instrument. [2​​​] In response to these critiques, the crypto sector has implemented strategies like Layer 2 solutions and the use of consensus mechanism like Proof-of-Stake (PoS) or Delegated PoS to address speed,[3​] while stablecoins have emerged to address the volatility element. Stablecoins can be thought of as a type of crypto asset that attempts to maintain price stability (value) by pegging or tying their value to an external reference in the form of real-world assets, like fiat currencies (singular or a basket) or physical assets in the form of commodities like gold or to one or more crypto assets. Alternatively, price stability is sought through leveraging algorithmic formulas and smart contracts that control supply by buying and selling the reference asset or its derivatives (known as algorithmic stablecoins). The Financial Stability Board (FSB) defines a stablecoin as 'a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets'. [​4​] There is no universally agreed legal or regulatory definition.

Stablecoins are currently predominantly used as a trading pair on crypto exchanges and in decentralised finance (DeFi) applications.[5​] In the long term, creators and developers hope to use stablecoin arrangements to facilitate cross-border payments and remittances.[6] The underlying business model is fairly straightforward- issuers earn interest on the reserves they hold while users gain utility by being able to move in and out of unbacked crypto assets without having to convert back into fiat currency and can participate in the emerging DeFi ecosystem.

Stablecoins have captured the attention of regulators since 2014 and gained further traction when Facebook (now Meta) positioned Libra in 2019. [​7] Since then, international standard setting bodies (SSBs) and international organisations (IOs) have developed several sets of recommendations aimed at ensuring globally consistent and comprehensive regulation, supervision and oversight of stablecoin arrangements. This includes the Financial Stability Board[9​], the Basel Committee for Banking Supervision (BCBS)[9], the Bank for International Settlements' Committee on Payments and Market Infrastructures (BIS CPMI)[1​​0​], the International Organization of Securities Commissions (IOSCO)[1​​1], and the Financial Action Task Force (FATF)[1​​2​].  Several jurisdictions are also in the process of developing regulatory frameworks aligned to these recommendations and based on their unique regulatory architectures.[13​​]

This focus on stablecoins stems from the fact that they have the potential to serve as a form of payment, store of value and could be a bridge between the crypto ecosystem and the traditional financial system. Broad adoption, which could happen quickly, will have far reaching macroeconomic implications for financial stability, monetary sovereignty and financial integrity among others.[14​​] Their design- collateralising with real-world assets- necessitates reliance on financial sector incumbents like banks and investment firms, representing a significant source of contagion between the traditional financial sector and the crypto ecosystem. Although adoption and interconnectedness with the traditional financial system is currently limited[1​​5], this can change over time and rapidly so. 

State of play in South Africa

Following the publication of the Intergovernmental Fintech Working Group's 2021 Position paper on crypto assets (Position Paper) [16​​], the Financial Intelligence Centre (FIC) and the Financial Sector Conduct Authority (FSCA) have made legislative changes to bring crypto assets into their respective regulatory folds.

The National Treasury and the FIC amended the Schedules to the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001) (FIC Act)[1​​7], including crypto asset service providers as accountable institutions in Schedule 1 to address anti-money laundering, countering the financing of terrorism, and combating proliferation financing (AML/CFT/CPF). These changes are aligned to the Financial Action Task Force standards.

The FSCA declared crypto assets as financial products under the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002) (FAIS Act).[1​​8] This introduced a licensing requirement for crypto asset service providers who furnish advice or render intermediary services (as defined in section 1 of the FAIS Act) in relation to crypto assets.

Aligned to the stance taken in the Position Paper and prevailing international standards like the Financial Action Task Force[1​​9], both regulatory approaches treat stablecoins as a type of crypto asset.

At the time of drafting the Position Paper, stablecoins were nascent. Consequently, the analysis and recommendations did not consider stablecoins in great detail.  The crypto asset landscape has evolved since the initial assessment of use cases as set out in the Position Paper. Currently, at least six rand-backed and rand-pegged stablecoin arrangements are operational in South Africa, all issued by non-banks. South Africans also have access to the most prominent foreign-currency denominated stablecoins like Tether (USDT) and Circle's USDC.

The gap​​

The FIC is concerned with AML/CFT/PF and the FAIS Declaration only extends to intermediary and advisory services (financial services). That means that even though a stablecoin arrangement can be licensed by the FSCA (because they perform advisory or intermediary services) and be registered with the FIC (for AML/CFT/PF purposes), they are not regulated for their primary purpose, key activities or the full suite of risks they pose.

Some important considerations relating to stablecoin arrangements are currently not explicitly addressed in regulation, including -

1. Rules or guidelines on who is allowed to issue a stablecoin or how these systems should be structured and operate.

2. The 'stability' of these tokens and the effectiveness of their stabilisation mechanisms.

3. Once issued, there are no requirements for independent checks on whether the stablecoin arrangement holds the reserves they claim to have or that these are invested in sufficiently liquid, good quality and easily convertible assets.

4. User rights vary across stablecoin arrangements - do holders have a claim against the issuer or the reserve assets? Can the coins be redeemed at par and on demand?

Until stablecoin arrangements are fully brought into the regulatory fold, like that initial user alert on crypto assets[20​​​​], mind the stablecoin gap.

[1​​] Bains, P., Ismail, A., Melo, F., and Sugimoto, N. (2022). Regulating the crypto ecosystem - The case of stablecoins and arrangements. International Monetary Fund (IMF), Fintech Note, Note/2022/08. https://www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-of-Stablecoins-and-Arrangements-523724

[2] Kosse, A., Glowka, M., Mattei, I. and Rice, T. (2023). BIS Papers No 141 Will the real stablecoin please stand up?. Bank for International Settlements. Accessible: https://www.bis.org/publ/bppdf/bispap141.pdf

[3] Infuy. (2024). Top Strategies to Optimize Blockchain Performance and Security.  Accessible: https://www.infuy.com/blog/top-strategies-to-optimize-blockchain-performance-and-security/#:~:text=To%20enhance%20blockchain%20transaction%20speed,Delegated%20Proof%2Dof%2DStake.

[4] Financial Stability Board. (2023). Final Report and High-Level Recommendations for the Regulation, Supervision and Oversight of “Global Stablecoin" Arrangements. Accessible: https://www.fsb.org/wp-content/uploads/P131020-3.pdf

[5​​] See the article Guide to Stablecoins: What They Are, How They Work and How to Use Them by BitPay (2023) for use case explanations. Accessible: https://bitpay.com/blog/guide-to-stablecoins/

[6] Coinbase Institute. (2022). Stablecoins White Paper. Accessible: https://assets.ctfassets.net/c5bd0wqjc7v0/79db1PxjBTv1JbL574fFvA/dc38c8c96dc97c3752fd81a61d0f134a/CBI-StablecoinWhitepaper-July-2022.pdf

[7​​] Arner, D., Auer, R. and Frost, J. (2020).  Bank for International Settlements Working Papers No 905

Stablecoins: risks, potential and regulation.  Accessible: https://www.bis.org/publ/work905.pdf

[8​​] High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements- Final Report (2023). Accessible: https://www.fsb.org/2023/07/high-level-recommendations-for-the-regulation-supervision-and-oversight-of-crypto-asset-activities-and-markets-final-report/

and the High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements- Final Report (2023). Accessible: https://www.fsb.org/wp-content/uploads/P170723-3.pdf

[9​​] Prudential treatment of cryptoasset exposures (2022). Bank for International Settlements, Basel. Accessible: https://www.bis.org/bcbs/publ/d545.pdf

[10​​] Application of the Principles for Financial Market Infrastructures to stablecoin arrangements (2022). Bank for International Settlements. Accessible: https://www.bis.org/cpmi/publ/d206.pdf

[11​​] Policy Recommendations for Crypto and Digital Asset Markets- Consultation Report (2023). Accessible: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD734.pdf

[12​​] FATF Report to the G20 Finance Ministers and Central Bank Governors on So-called Stablecoins (2020). Accessible: www.fatf-gafi.org/publications/virtualassets/documents/report-g20-so-called-stablecoins-june-2020.html

[1​​3] Bank for International Settlements. (2024). Stablecoins: regulatory responses to their promise of stability. FSI Insights on policy implementation No 27. Financial Stability Institute. Accessible: https://www.bis.org/fsi/fsisummaries/global_stablecoins.pdf

[1​​4] Bains, P., Ismail, A., Melo, F., and Sugimoto, N. (2022). Regulating the crypto ecosystem - The case of stablecoins and arrangements. International Monetary Fund (IMF), Fintech Note, Note/2022/08. https://www.imf.org/en/Publications/fintech-notes/Issues/2022/09/26/Regulating-the-Crypto-Ecosystem-The-Case-of-Stablecoins-and-Arrangements-523724

[1​​5] Financial Stability Board. (2023). The Financial Stability Implications of

Multifunction Crypto-asset Intermediaries.  Accessible: https://www.fsb.org/wp-content/uploads/P281123.pdf

[1​​6] Accessible: https://www.ifwg.co.za/Reports/Position%20Paper%20on%20Crypto%20Assets.pdf

[1​​7] https://www.fic.gov.za/wp-content/uploads/2023/10/Financial-Intelligence-Centre-Act-2001-Act-38-of-2001.pdf

[18​​] See General Notice 1350 of 2022 (Declaration) here:  https://www.gov.za/sites/default/files/gcis_document/202210/47334gen1350.pdf

[1​​9] See  FATF Report on so-called Stablecoins to the G20 Ministers of Finance and Central Bank Governors (2020) - VIRTUAL ASSETS – DRAFT FATF REPORT TO G20 ON SO-CALLED STABLECOINS (fatf-gafi.org)

[20​] https://www.treasury.gov.za/comm_media/press/2014/2014091801%20-%20user%20alert%20virtual%20currencies.pdf ​

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