Application of Financial Market Infrastructure Principles to Stablecoin Arrangements

The Bank for International Settlements and Market Infrastructure Committee on Payments and Markets (BISCPMI) and the International Organization of Securities Commissions (IOSCO) have jointly released the Application of Financial Market Infrastructure Principles to Stablecoin Arrangements as a regulatory guide for stablecoin arrangements. The guidance emphasizes that if a stablecoin performs a transfer payment function and regulators deem it important to the financial system, it should comply with the Principles for Financial Market Infrastructures (PFMI), which are international standards for financial market infrastructure, and countries will decide whether to to put them in place. Going forward, CPMI and IOSCO will continue to review regulatory issues related to stablecoin offerings and coordinate with other standard-setting bodies. The Financial Technology Research Institute of Renmin University of China (WeChat ID: ruc_fintech) compiled the core part of the file.

I. Introduction

1.1 Background

The payment field is developing rapidly. The widespread growth of financial innovation has lowered barriers for new players to provide payment services. Operators of stablecoin arrangements ( SAs ) are among the new players. SAs are arrangements that combine a range of functions to provide a tool known as a means of payment and store of value. However, specific SAs may serve different purposes and may evolve over time.

With the advent of stablecoins, the international regulatory community has sought to gain a better understanding of these new entrants and the potential risks they may pose to the financial system. The G7 Stability Board Working Group and the Financial Stability Board ( FSB ) have worked on the impact of global SAs and have each issued regulatory advice. As part of this work, the G7, G20 and FSB recognized the potential role of the Special Account in improving global cross-border payments and called on standard-setting bodies “as needed, based on the FSB report and After reviewing its existing framework, make any revisions to the standards and principles, or provide further guidance that complements existing standards and principles, including cooperation, coordination and information sharing among authorities.” These standard-setting bodies include the Committee on Payments and Market Infrastructures ( CPMI ) and the International Organization of Securities Commissions ( IOSCO ).

As appropriate, CPMI and IOSCO will further review regulatory issues related to SAs and, where necessary and appropriate, coordinate with other standard setting bodies to address outstanding standards gaps. This report does not cover the specific issues of stablecoins denominated in or pegged to a basket of fiat currencies, as these will be covered in future work that will consider whether the guidance in this report is adequate when seeking to comply with financial The Market Infrastructure Principles (Financial Market Infrastructure Principles) provide clear information for multi-currency SAs .

CPMI and IOSCO issued a consultation on October 6, 2021, and asked for comments until December 1 , 2021 receiving 26 submissions . All comments are carefully reviewed and most of them are reflected in the final report. Given the purpose of this report, comments not directly related to the purpose of the report or to raise general questions related to the introduction of SAs were not reflected in the report. Some of these issues are subject to further consideration by CPMI , IOSCO and other relevant standard setting bodies.

1.2 Purpose

The purpose of this report is to provide guidance on the application of financial market infrastructure principles to SAs deemed systemically important for financial market infrastructure. This report is intended for use by systemically important SAs in the design, development and operation of their services and arrangements, including SAs that may be systemically important after publication ; responsibilities. The guidance in this report does not create additional standards for SAs beyond those set out in the Financial Market Infrastructure Principles, but rather aims to improve clarity on how systemically important SAs should observe certain aspects of the Financial Market Infrastructure Principles. The topics in this report are interconnected and intended to be considered holistically, similar to the standards set out in the Principles for Financial Market Infrastructures.

1.3 General applicability of financial market infrastructure to SAs

SAs can be designed and organized in a variety of ways. In particular, as stated in the G7 Stablecoin Working Group and the Financial Stability Board report, stablecoin arrangements “can serve as a means of payment and store of value, . . . , generally providing three core functions: ( i ) the issuance of monetary value, redemption and stabilization; ( ii ) transfer of currency; and ( iii ) interaction with currency users to store and exchange coins”. In some cases, all three functions are performed by one entity, while in other cases, the functions are separated, i.e. each function is managed by a different entity or individual.

The Financial Market Infrastructure Principles define a financial market infrastructure as “a multilateral system among participating institutions, including system operators, used to clear, settle, or record payments, securities, derivatives, or other financial transactions. Financial market infrastructures typically Establish a common set of rules and procedures, technical infrastructure and a dedicated risk management framework applicable to transactions for all participants He takes the risks they incur. Financial market infrastructure is the financial market infrastructure between participants or between themselves and a central party Transactions provide centralized clearing, settlement and recording to increase efficiency and reduce cost and risk.” The Financial Market Infrastructure Principles go on to state that “between financial market infrastructures that have the same function, there may be significant differences in design.”

In considering the functions of financial market infrastructure and the functions performed by SAs , CPMI and IOSCO have identified transfer functions as financial market infrastructure functions. Therefore, in order to apply the principles of financial market infrastructure, SAs that perform transfer functions should be considered as financial market infrastructure. For SAs primarily used for payments , the principles applicable to payment systems, including those for which no further guidance is provided in this report, will fully apply to SAs that perform transfer functions based on a functional approach (“same business, same risk or risk profile, same rule”). The functions provided by SAs are more similar to those provided by other types of financial market infrastructure, and SAs should consider relevant principles and comply with them accordingly. However, these scenarios are beyond the scope of this report. In order to apply the guidance provided in this report, it must be acknowledged that regardless of the legal characteristics of SAs under the legal and regulatory framework of a particular jurisdiction, the guidance will apply to SAs that perform a transfer function and are considered systemically important by the relevant authorities . The principles of financial market infrastructure are intended to be applied to systemically important financial market infrastructure. If SAs perform a transfer function and are determined by the authorities to be systemically important, the SAs as a whole should comply with all relevant principles of the Financial Market Infrastructure Principles. For the scope of this report, it should be noted that this guidance is intended to address systemically important SAs that perform transfer functions , and that this guidance does not consider non- SAs that use or accept stablecoinsFinancial market infrastructure. Furthermore, the use or acceptance of stablecoins as a means of payment (such as in the provision of financial services) is not in itself equivalent to performing a transfer function. Other international standards or principles may also be relevant if stablecoins are used for investment or speculative purposes in trade, lending activities or other financial services activities.

1.4 Salient features of SAs

Although SAs are viewed as financial market infrastructures based on a functional approach, they may present some new features compared to other financial market infrastructures. CPMI and IOSCO believe that guidance on these characteristics is useful to SAs and relevant authorities when applying the principles of financial market infrastructure to systemically important SAs .

According to CPMI and IOSCO , a unique feature of SAs compared to existing financial market infrastructure is the use of stablecoins to settle assets that may be neither central bank money nor commercial bank money. The security of SAs funds settlement will depend on the credit and liquidity risks arising from entities issuing and redeeming stablecoins, the assets used to support the stablecoin’s value, and related custody and investment arrangements. It also depends on the user’s ability to access these assets. Currency settlement plays a vital role in the functioning of financial market infrastructure.

A further feature of SAs is that some features in SAs are more pronounced than existing financial market infrastructure , such as interdependent functions. As mentioned above, SAs typically perform functions other than transfer functions. To varying degrees, these functions may require other activities that contribute to or affect financial market infrastructure functions, or may be mixed with financial market infrastructure functions, so their performance affects the ability of SAs to observe financial market infrastructure principles as a whole. In fact, the boundaries of a financial market infrastructure function and the boundaries between that function and other SAs ‘ functions and activities may vary by SAs model. For example, in some SAs models, all SAs functions may be performed and managed by a single entity; while in other models, each SAs function may be performed by a separate entity, including non-financial market infrastructure and unregulated entities. The existing financial market infrastructure also has  institutional interdependence  , and the financial market infrastructure principle provides the standard for the financial market infrastructure to comprehensively manage the risks generated or assumed by the financial market infrastructure, including the risks arising from interdependence. This report builds on this standard and provides guidance in the context of security’s multiple interdependent functions.

Finally, SAs may have new capabilities that other financial market infrastructures may also adopt. These functions include the use of distributed or automated technical protocols, and the promotion of decentralization of operations and governance through the use of these technical protocols. While the Financial Market Infrastructure Principles do not prescribe the use of a certain technology, new and innovative technologies may affect the way that financial market infrastructure adheres to certain principles. For example, the use of distributed ledger technology ( DLT ) in the transfer function of SAs may create a misalignment between legal (settlement) finality and technical settlement. It may also promote varying degrees of decentralization of financial market infrastructure operations and organizational structures compared to the typical centralized nature of financial market infrastructure functions in existing financial market infrastructures. This report provides some guidance on these capabilities, making SAs likely the first to deploy these new technologies and models at scale.

2. Considerations for Determining the System Importance of SAs

Financial market infrastructure principles apply to systemically important financial market infrastructure. Certain types of financial market infrastructure (central counterparties, central securities depositories, securities settlement systems and transaction repositories) are considered systemically important at least in the jurisdiction in which they are located, but not for payment systems assumptions, so they are evaluated individually. The Financial Market Infrastructure Principles observe that “where definitions exist, statutory definitions of systemic importance may vary by jurisdiction”.

The Financial Market Infrastructure Principles describe factors that authorities can consider when determining whether financial market infrastructure is systemically important within their jurisdiction. For example, in general, a payment system is systemically important if it has the potential to trigger or transmit a system outage. Include, among other things: i ) systems that are the sole payment system or primary system in a country in terms of the total value of payments; ( ii ) systems that primarily process time-critical, high-value payments; and ( iii ) systems that are settled for A system that affects payments settled by other systemically important financial market infrastructures. These systems can be domestic, cross-border or multi-currency.

CPMI and IOSCO have identified four overarching considerations, as well as more granular fundamentals, to provide additional context that authorities can consider when assessing the systemic importance of SAs in their jurisdictions for the purpose of applying financial market infrastructure principles background. These considerations may be in addition to any other aspects the authorities deem relevant to their analysis. The organization, design and function of the Special Administrative Region are constantly evolving, and the design and use of the Special Administrative Region may vary from jurisdiction to jurisdiction. These considerations thus provide flexibility for authorities to assess the systemic importance of SA . This set of considerations is intended for an overall assessment, rather than treating each point as an independent reflection of systemic importance. Considerations include:

The size of the I.SAs , i.e. whether the stablecoin is used as the primary payment or settlement mechanism in the jurisdiction or the market it serves. This may include considering:

a. The number of stablecoin users;

b. The number and value of transactions and the value of stable currency in circulation.

II . The nature and risk profile of SAs activities. This may include considering:

a. Types of stablecoin users, such as retail customers, financial entities;

b. The type or nature of the transaction, based on the following indicators:

i ) the time criticality of a given transaction that may be disrupted;

ii ) the wholesale or retail nature of the transaction;

iii ) the use or purpose of the transaction, such as whether the SAs are used for cross-border payments, financial transactions / investments, currency operations or foreign exchange transactions;

iv ) the denomination of the stablecoin and its reserve assets.

III . The correlation and interdependence of SAs, especially whether SAs have significant correlation and interdependence with the real economy and financial system. This may include considering:

a. Interconnectivity with other systemically important financial market infrastructures and institutions, as well as the real economy and government (e.g. whether SAs are used to settle transactions for governments, important financial markets or other financial market infrastructures);

b. Complexity of business, structure and operations: The more complex SAs are, the more likely they are to be interdependent, and the greater the challenge of managing them given the more entities involved and the likely channels of risk transmission.

IV. Fungibility of SAs, i.e. whether there are alternatives available to use SAs as payment or settlement methods for time-critical services.

These considerations may be used by agencies regulating SAs or assessing the systemic importance of SAs to their respective jurisdictions. Under Responsibility A of the Financial Market Infrastructure Principles , authorities should clearly define and publicly disclose the criteria used to identify financial market infrastructure subject to regulation, supervision and oversight, including those used to determine its systemic importance. Within this framework, relevant authorities should monitor developments related to SAs and may consider the potential growth and future status of SAs, as appropriate, to determine the systemic importance of SAs under development . Relevant authorities should explore and, where appropriate, develop cooperative arrangements that take into account the systemic importance of SA to their respective jurisdictions. This collaboration helps foster consistency in determining the systemic importance of SAs operating in multiple jurisdictions.

3. Guidelines for specific principles

3.1 Background

As mentioned above, systemically important SAs should adhere to all relevant principles of the Financial Market Infrastructure Principles and refer to the Principles, Key Considerations and Explanatory Notes when considering their governance, design and operating models. The following guidance may help SAs and related institutions understand how certain principles of the Financial Market Infrastructure Principles can be applied in light of these characteristics.

The guidance provided in this report should be understood in the context of the principles-based approach reflected in the Principles of Financial Market Infrastructures, which acknowledges the different organization, function and design of financial market infrastructure, and the different ways in which specific outcomes can be achieved. The guidance provided in this report should be read in conjunction with the related principles, key caveats and explanatory notes in Principles for Financial Market Infrastructures. While it is not the purpose of this guidance to impose additional standards on systemically important SAs or authorities beyond those set out in the Financial Market Infrastructure Principles, SAs may need to consider this guidance on their rules, procedures, governance arrangements and Changes to the risk management framework to align its practices with financial market infrastructure principles.

Against this background, this section describes the context and issues and provides guidance on governance (Principle 2 ), an integrated risk management framework (Principle 3 ), settlement finality (Principle 8 ) and monetary settlement (Principle 9 ).

3.2 Governance


Of the Principles for Financial Market Infrastructures, Principle 2 outlines the expectation that governance arrangements for financial market infrastructures will promote the safety and efficiency of financial market infrastructures and support the stability of the wider financial system, other relevant public interest considerations and interests. target of the person. To this end, the Principles set out governance standards for financial market infrastructure. Specifically, the principle states that FMI should document and disclose governance arrangements, provide clear and direct responsibilities and obligations, and clearly define the roles and responsibilities of the FMI board (or equivalent) and its management. The Principles also stipulate that FMI boards should establish a clear and documented risk management framework. Therefore, governance arrangements for financial market infrastructure should ensure that the overall risk management framework of financial market infrastructure allocates responsibilities and obligations for risk decision-making and decision-making in crises and emergencies. The explanatory text states that governance arrangements should provide for effective decision-making in a crisis and support any procedures and rules designed to facilitate the recovery or orderly closure of financial market infrastructure.

The explanatory text of Principle 2 further states that financial market infrastructures that are part of large organizations may need to pay particular attention to aspects of their governance arrangements, including the structure of parent or affiliated organizations, to ensure that such arrangements do not affect financial market infrastructures. Adverse effects of compliance with financial market infrastructure principles. The explanatory text also states that a financial market infrastructure should take into account and adequately manage any risks posed by other services of the financial market infrastructure to its functioning of the financial market infrastructure.

Therefore, the organization of financial market infrastructures consisting of one or more legal entities ultimately controlled by natural persons is essential for financial market infrastructures to comply with Principle 2 . In addition, the ability of a financial market infrastructure to comply with Principle 2 and all relevant principles of the Financial Market Infrastructure Principles depends on the appropriate governance arrangements of the relevant non-financial market infrastructure counterparts (such as affiliated organizations).


CPMI and IOSCO have identified three major challenges that certain SAs may face when seeking to comply with Principle 2 .

First, the governance of SAs may be partially or fully decentralized, and there may be no legal entities and individuals controlling financial market infrastructure functions. In particular, the transfer function can be set up as a smart contract on a permissionless public ledger. These smart contracts can specify the verification mechanism upon which the transfer function affects settlement. For these SAs models, governance of the transfer function may be performed solely by software (while human-machine interaction with smart contracts may be part of the coding of the SAs ), and there may be no identifiable legal entity or individual responsible and accountable for the transfer function.

Second, the relevant financial market infrastructure operates in a dynamic and changing environment, requiring ongoing mechanisms for making changes to its design or operation when needed. However, this may not be feasible for some SAs models. While software-controlled governance arrangements, such as smart contracts, may improve transparency and predictability, software-only governance may be inflexible under changing circumstances, as software-based It is not feasible to account for all unpredictability and contingency in the code. For example, this may be a particular issue during a crisis, where expert judgment and discretion may be required to deal with unforeseen circumstances, or in the presence of an identified problem (such as a cyber attack) or a software implementation bug. In this case, effective governance cannot be achieved by smart contracts alone (i.e. without timely human intervention). Rather, such situations may require governance arrangements for SAs so that automated software or algorithms for SAs can be adjusted or changed by natural persons when needed.

Finally, the governance of other SAs ‘ functions may affect the ability of SAs to comply with all relevant principles of Principle 2 and the Financial Market Infrastructure Principles. As discussed in Section 1 , SAs are often designed to interweave transfer functions with other SAs functions. If these other functions are subject to a separate governance arrangement that does not take into account the risks these functions pose to the transfer function of SAs , the governance of the transfer function of SAs may be less efficient in certain circumstances .


Systemically important SAs should have appropriate governance arrangements. When seeking to comply with Principle 2 , systemically important SAs should consider:

1 ) The ownership structure and operations of SAs allow for clear and direct lines of responsibility and obligations. For example, it is owned and operated by one or more identifiable and responsible legal entities ultimately controlled by natural persons;

2 ) the governance of SAs allows for timely human intervention, as needed, to maintain ongoing compliance with Principle 2 and other relevant principles of the Financial Market Infrastructure Principles;

3 ) The ownership structure and operations of SAs allow SAs to comply with Principle 2 and other relevant principles of the Financial Market Infrastructure Principles, regardless of the governance arrangements of other interdependent functions.

3.3 Integrated Risk Management Framework


Principle 3 aims to promote a comprehensive and comprehensive understanding of financial market infrastructure risks. This includes the risks that the financial market infrastructure assumes to its participants, clients and other entities such as other financial market infrastructures, banks, liquidity providers and service providers. Principle 3 sets the expectation that financial market infrastructures should have a robust risk management framework for comprehensive management of legal, credit, liquidity, operational and other risks. It states that financial market infrastructures should have risk management policies, procedures and systems that enable them to identify, measure, monitor and manage the range of risks that arise in or are assumed by financial market infrastructures. It also clarifies that FMIs should periodically review other entities (such as other FMIs, settlement banks, liquidity providers, and service providers) for the significant risks they take due to interdependencies and develop strategies to address those risks. tool.


CPMI and IOSCO have identified a broad issue that certain SAs may face when seeking to comply with Principle 3 .

SAs perform a variety of interdependent functions, some of which (i.e. issuance, redemption and stabilization of coin value and interaction with users) may fall outside the scope of FMI principles as they do not constitute FMI functions. Like other financial market infrastructures, SAs may rely on the transfer functions of other entities (such as other financial market infrastructures, settlement banks, liquidity providers, validating node operators and other node operators or service providers) who May pose a significant risk to functionality.

Furthermore, depending on the organizational structure of the SAs, the entities performing the functions of other SAs may be independent of the entities performing the transfer functions, or may not qualify as participants or service providers of financial market infrastructure. However, other SAs functions and the entities performing those functions may have risk implications (legal, credit, liquidity, business, operational and other risks) to the transfer function and vice versa. These factors may complicate the task of comprehensive risk management of SAs to comply with Principle 3 . Furthermore, multiple interdependent functions may hinder the identification of (responsible) entities that should be incorporated into a comprehensive comprehensive view of financial market infrastructure risks in accordance with Principle 3 .


Systemically important SAs should periodically review financial market infrastructure functions from other SAs functions and entities performing other SAs functions or SAs rely on their transfer functions (such as other financial market infrastructures, settlement banks, liquidity providers, validator node operations and other node operators or service providers) assume and pose significant risks to them. Systemically important SAs should develop appropriate risk management frameworks and tools to address these risks. In particular, it should identify and implement appropriate mitigation measures, taking a holistic view of its risks.

3.4 Settlement finality


In the Financial Market Infrastructure Principles, Principle 8 defines final settlement as “the irrevocable and unconditional transfer of assets or financial instruments, or the performance of obligations by a financial market infrastructure or its participants in accordance with the terms of the underlying contract”. Final settlement (or settlement finality) is a legally mandated moment (see also Financial Market Infrastructure Principle 1 ).

In order to reduce settlement risk, clarity and certainty of settlement finality is critical, which can lead to systemic risk if not managed properly. Specifically, of the Financial Market Infrastructure Principles, Principle 8 states that the rules and procedures of a financial market infrastructure should clearly define the final point of settlement. It further states that “financial market infrastructure should complete final settlement before the end of the value date, preferably on the same day or in real time, to reduce settlement risk” and clearly defines that participants cannot reverse outstanding payments, transfer instructions or other obligations. Depending on the type of debt settled by the financial market infrastructure, the use of intraday settlement may be necessary or desirable to reduce settlement risk. It also states that “the legal basis governing financial market infrastructure, including insolvency law, must recognize the discharge of payments, transfer instructions or other obligations between financial market infrastructure and system participants, or between participants or between participants. , in order for the transaction to be considered final.”


CPMI and IOSCO have identified a broad range of issues that certain SAs may face when seeking to comply with Principle 8 .

SAs may feature “probabilistic settlement” where inconsistencies between ledger status and legal finality may occur. For example, because when using some consensus mechanisms, the probability of revocation of a node-validated transaction converges to zero over time, but does not reach zero, or because a “fork” occurs.

For probabilistic settlements, even if the relevant legal framework and the rules and procedures of SAs have defined the point at which final settlement occurs, there remains the possibility that verification of transactions on the ledger (technical settlement) can never be achieved with absolute certainty, or that there may be Causes the reversal of a transaction fork that was validated on a competing (and later discarded) ledger. As more transactions are added to the ledger, the probability that a given state of the ledger is decisive increases. At the same time, the settlement risk impact of a “fork” increases with the number of transactions in the ledger, as those transactions may be reversed. According to Principle 8 , clearly defining and implementing final settlement points can be challenging for certain types of SAs that may have probabilistic settlement characteristics. As is the case with other financial market infrastructures, “due to the complexity of the legal framework and system rules, especially in the context of cross-border settlements where the legal framework is not harmonized, a reasonable, independent legal opinion is usually required to determine what eventually happened.” point.” This is relevant to SAs because of their significant functions, especially the potential role of some SAs in cross-border payments .

The misalignment between legal finality and ledger state could be exacerbated in the absence of a legal entity responsible for the transfer function of SAs , including setting and maintaining the rules and procedures that should be followed when transactions are reversed and forked. Without a responsible legal entity, the legal finality of a transaction may not be enforced if the transaction or the resulting legal claim conflicts with the settlement status on the ledger. Additionally, in the event of a fork, technically settled transactions can continue on the ledger. In this case, a new transaction on the forked ledger may eventually also achieve technical settlement and be considered final (in terms of the rules and procedures of the forked ledger), however, since the forked ledger Without expressing valid legal claims, they may still be partially or fully revoked through legal action taken outside the system.

Furthermore, settlement finality is designed to ensure protection from reversal in the event of insolvency of one or more participants or clearing operators, i.e. to ensure that transactions of an insolvent entity settled with finality are considered final, liquidators and related Authorities do not consider it invalid or revocable. While a “fork” may not constitute a revocation in this sense, it may have similar adverse consequences for the transferee’s acquired positions and subsequent continued transfers. Given this situation, SAs should take steps to prevent any inconsistency between the legal status of the transferred stablecoin and its status on the ledger. In addition to these measures, SAs should develop measures to address the risks that may arise for SAs , their users or other related entities in the event of subsequent reversal of transactions on the ledger .


Systemically important SAs should provide clear and definitive final settlement at least by the end of the value date, regardless of the operational settlement method used. Where necessary or desirable, such settlement shall be provided on an intraday or real-time basis. When seeking to comply with Principle 8 , systemically important SAs should:

1 ) clearly define the point at which the transfer of stablecoins becomes irrevocable and unconditional through the operational settlement method used;

2 ) Ensure that there is a clear legal basis to recognize and support the finality of the transfer;

3 ) Have robust mechanisms to prevent any misalignment between the ledger state and legal finality, and to ensure that the legal finality of transfers, once they occur, is maintained regardless of the competing state of the ledger.

3.5 Currency settlement


Financial Market Infrastructure Principle 9 sets expectations for financial market infrastructure to settle assets. Settlement assets are transferred between financial market infrastructure participants to settle payment obligations. Transaction settlement may occur on the financial market infrastructure’s own books, on the books of another financial market infrastructure, or on the books of an external party (such as a central bank or commercial bank). Principle 9 states: “Financial market infrastructure should, where feasible and available, conduct monetary settlements in central bank money. If central bank money is not used, financial market infrastructure should minimize and strictly control the resulting use of commercial bank money. credit and liquidity risk”.

Participants in financial market infrastructure can hold settlement assets on the same day or overnight to settle their payment obligations. However, if participants hold settlement assets, they may be exposed to the credit risk and liquidity risk of the settlement assets. Providers of settlement assets could default on their obligations to them, they would be exposed to credit risk, and they would be exposed to liquidity risk if the assets were no longer readily transferable, such as into claims on central banks or other liquid assets. Where these risks exist, they can have systemic effects because all participants holding settlement assets are exposed to them simultaneously. This makes it highly desirable that there is no risk of a settlement asset provider defaulting.

The objective of Principle 9 is that, where feasible and available, financial market infrastructures use central bank money, or otherwise use settlement assets with little or no credit and liquidity risk, which are Easily convertible into central bank money or other liquid assets in times of stress. One of the fundamental purposes of central banks is to provide safe, liquid settlement assets. In less common cases, the settlement asset can be a claim on a private regulated institution, such as a commercial settlement bank. Balances on commercial bank books can be transferred between payment system participants’ accounts at that bank. However, in these cases, unlike currency-issuing central bank balances, participants are exposed to the credit and liquidity risks of the commercial banks that provide the settlement assets.

In order for the use of commercial bank money as a settlement asset to be consistent with Principle 9 as an acceptable substitute for central bank money, Principle 9 states that the asset must have little or no credit or liquidity risk. Principle 9 sets out the relevant factors to determine whether additional credit and liquidity risks are reduced to a minimum where settlement assets are privately issued by commercial banks or financial market infrastructures themselves (financial market infrastructures that settle on their own books) minimum and strictly controlled. For example, if a commercial bank that clears its books goes bankrupt, the financial market infrastructure and its participants may not have immediate access to their settlement funds or ultimately the full value of their funds. To this end, financial market infrastructures should limit exposure to commercial settlement bank failures and limit potential losses and liquidity pressures in the event of such failures. Financial market infrastructures should set and monitor their compliance with stringent standards for their commercial settlement banks, taking into account their effective supervision, creditworthiness, capitalization, liquidity and operational reliability.


CPMI and IOSCO have identified a broad range of issues that certain SAs may face when seeking to comply with Principle 9 .

Privately issued settlement assets should have little or no credit or liquidity risk to be considered an acceptable alternative to the use of central bank money in order to comply with Principle 9 . In SAs , since the stablecoin is used as a settlement asset, participants will be subject to the credit and liquidity risks of the stablecoin itself, the stablecoin’s issuer, or the settlement agency. This could lead to greater risk than “never” credit and liquidity risk, and may not allow financial market infrastructure and its participants to easily convert their assets into other liquid assets, such as claims on central banks.

SAs may be backed by underlying funds, securities or other assets (collectively, “reserve assets”). Funds received by SAs participants may be: ( i ) deposited with commercial banks; ( ii ) deposited with central banks; or ( iii ) invested in safe and liquid assets to be held by custodians. How and to what extent reserve assets are backed depends on the design of the relevant stablecoin and the relevant contractual arrangements and applicable law. These will have a significant impact on the level of rights protection of stablecoin holders and other relevant SAs participants and their confidence in the value of stablecoins as settlement assets and therefore need to be clarified by SAs and transparent to SAs holders and participants . In addition, the level of protection and confidence will depend on the adequacy of the regulatory framework applicable to issuers, reserve managers and custodians of reserve assets.

Participants may be exposed to credit risk if the stablecoin loses value relative to the sovereign currency to which it is denominated or pegged, or if the stablecoin’s issuer breaches its obligations to the participant. Participants may face liquidity risk if stablecoins cannot be immediately converted into other liquid assets. Under some SAs models, the settlement institution (“provider of settlement account”) and the stablecoin issuer (“provider of settlement asset”) can be two different institutions, with SAs providing participants with their own books of stablecoins The settlement account on the account as a settlement asset issued by a third party. Under these models, participants may be exposed to credit risk and liquidity risk from issuers and settlement account providers. For example, record-keeping operational issues related to stablecoin ownership of SAs may delay immediate redemption from issuers. Measures to address these risks may include support for committed lines of credit, third-party guarantees, and procedures for allocating losses arising from issuer defaults or a decline in the value of stablecoins.

Additionally, stablecoins may be vulnerable to confidence effects or “operational risks.” If reserve assets are insufficient or cannot be liquidated at or near market value in a timely manner when needed, stablecoins may depreciate, presenting credit or liquidity risks to SAs participants and leading to a loss of confidence. If participants in SAs lose confidence in the value of the stablecoin or in its ability to convert it at face value into other liquid assets — such as claims on central banks — this could lead to massive redemptions. This, in turn, could lead to a massive “sell-off” of reserve assets, further reducing the value of the stablecoin and further redemptions. If these confidence effects spread to non-retail participants holding stablecoins (such as financial institutions) or financial assets investing in stablecoin reserve assets, they could have systemic effects. If not properly monitored, mitigated, and managed, these risks to stablecoins can be greater than commercial bank funds.

Finally, there are many different SAs issuance, stabilization and redemption models. These models are inherently intertwined with the safety and efficiency of SAs transfer functions. Some non-bank SAs may issue stablecoins in the name of SAs that represent assets in protected custody, rather than stabilizing the value of the stablecoins by actively managing reserve assets. When SAs receive assets from their participants and use them to back the value of the stablecoin, SAs and their participants may be exposed to credit risk and possible liquidity if the custodian of the assets defaults on their obligations to the SAs or their participants risk. SAs should place, protect or invest in these assets in a manner that minimizes the risk of loss and delayed access to these assets, and enables stablecoins as settlement assets with little or no credit or liquidity risk.


Systemically important SAs Stablecoins used for currency settlement should have little or no credit or liquidity risk. When assessing the risks posed by stablecoins, SAs should consider whether stablecoins provide their holders with direct legal claims on the issuer and claims, title or interest in the underlying reserve assets for timely conversion to other liquidity at face value Assets, such as claims on central banks, and a clear and robust process for fulfilling holders’ claims during normal and stressful times.

In seeking to comply with Principle 9 , systemically important SAs should determine whether the credit and liquidity risks of their stablecoins used for currency settlement are minimized and strictly controlled, and whether stablecoins are an acceptable alternative to the use of central bank money Taste. Relevant factors may include, but are not limited to:

1 ) Clarity and enforceability of legal claims, ownership, interests, and other rights and protections conferred on stablecoin holders and SAs participants in relation to the stablecoin issuer and the reserve assets backing it, including their other protections such as bankruptcy and third-party guarantees of the person, its reserve manager or reserve asset custodian.

2 ) The nature and adequacy of SAs reserve assets to support and stabilize the value of outstanding shares of issued stablecoins, and the extent to which SAs reserve assets can be liquidated at or near prevailing market prices.

3 ) Clarity, robustness, and timeliness of the process of converting stablecoins into other liquid assets (such as claims on central banks) under normal and stressful conditions. This stablecoin should be converted into other liquid assets as soon as possible, at least at the end of the day, preferably the same day.

4 ) The creditworthiness, capitalization, liquidity and operational reliability of stablecoin issuers, settlement account providers and reserve asset custodians. Reserve assets held or in escrow should be protected from claims by custodian creditors.

Any chosen custodian should have sound accounting practices, custodial procedures and internal controls to protect assets, as well as a sound legal basis to support its activities, including asset segregation.

5 ) The adequacy of the regulatory framework applicable to reserve asset issuers, reserve managers and custodians.

6 ) There are risk controls that can reduce credit and liquidity risks when needed. Possible examples include collateral pools to back committed lines of credit, third-party guarantees, and procedures for allocating losses due to issuer defaults or a drop in stablecoin value.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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