Randal Quarles, Chairperson of the Financial Stability Board (FSB) has warned that stablecoins “may pose regulatory challenges” to the financial ecosystem in the future. The FSB is tasked with monitoring and assessing vulnerabilities in the global financial system.

“The introduction of stablecoins … brings a potentially new scale and scope that the financial regulatory community must carefully consider,” Quarles said in an address at the European Banking Federation Summit in Belgium.

Stablecoins are cryptoassets whose value is pegged to a fiat currency or a basket of goods. Typically, stablecoins are backed by reserves to ensure that their price remains relatively stable as compared to the volatile price swings of other cryptoassets, such as Bitcoin or Ethereum’s Ether. While it is not a stablecoin in the strict sense of the word, Facebook’s Libra, which is backed by a combination of government bonds and fiat currencies, uses stablecoin principles to ensure low volatility.

There has been an explosion of stablecoins in recent times because they fulfill the original promise for the use of cryptoassets as a medium of daily transaction. But their proliferation brings its own set of challenges for governments. For example, stablecoins could end up competing with national currencies and, in cases of economic instability, become a dominant currency for transactions among citizens.  

“This (introduction of stablecoins) is an issue that can potentially affect every country in the world,” Quarles said. At the recommendation of the G20, the FSB is identifying appropriate regulations that apply to stablecoins, he said. “…Once that assessment is complete, we will report to the G20 on any appropriate actions that need to be taken to ensure that financial stability is not negatively affected by their introduction.”

During his address, Quarles also referenced market fragmentation or the emergence of different financial regulatory regimes across the world based on risk tolerance and economic conditions. Market fragmentation could lead to increased regulatory arbitrage, said Quarles. The development of an ecosystem for stablecoins and cryptoassets is also a function of regulatory arbitrage. While crypto has gained ground and traction in Asia, the United States, home to the most sophisticated financial market in the world, is still figuring out a place for them in the existing system.