Future of Stablecoin Regulation: When Global Principles Meet Local Action
Diego A. Ramos Castillo
Founding Partner/ Banking, Fintech & Cryptoassets Team Leader @Ramos, Ripoll & Schuster
Introduction
Stablecoins are digital assets designed to maintain a stable value by being pegged to a reserve asset, usually a fiat currency like the US dollar or a basket of goods. Unlike volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins aim to offer the benefits of digital currency—such as instant transactions and lower fees—without the downside of price volatility. Their relevance has surged recently, as they serve as a bridge between traditional fiat currencies and cryptocurrencies, enabling quicker and more efficient financial transactions in various sectors, including remittance, payment processing, and decentralized finance (DeFi).
As stablecoins continue to gain traction as a viable digital asset, regulatory bodies worldwide are establishing guidelines to ensure market integrity, investor protection, and financial stability. This article aims to revisit Monetary Authority of Singapore (MAS) framework on stablecoins and align it with international standards, incorporating insights from the Financial Stability Board (FSB) "High-level Recommendations for the Regulation, Supervision, and Oversight of Global Stablecoin Arrangements" and the joint report entitled "Application of the Principles for Financial Market Infrastructures to Stablecoin Arrangements (PFMISA)" prepared by the Bank for International Settlements – BIS Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). In doing so, we examine how a localized approach like Singapore’s MAS is linked with broader international guidelines to form a comprehensive and potentially effective stablecoin regulatory landscape for other countries to base on.
Key International Guidelines: GSC and PFMISA
While the Financial Stability Board provides a set of High-Level Recommendations for Global Stablecoin Arrangements (GSCs), the PFMISA report focuses on principles that are relevant for Stablecoin Arrangements (SAs) considered systemically important. These guidelines arise from the growing influence of digital assets on the financial ecosystem and call for clearer standards by international bodies like G7 and G20.
Bridging MAS and PFMISA Principles
On August 2023, the Monetary Authority of Singapore (MAS) established its final regulatory approach for stablecoins after consultations with the public in December 2019 and October 2022. Stablecoins have evolved as a new class of digital payment tokens with increasing potential for widespread usage.
MAS proposes a framework for stablecoins pegged to the Singapore Dollar or Group of Ten (G10) currencies, known as Single-Currency Stablecoins (SCS), issued in Singapore.
Both MAS and PFMISA stress the need for robust governance frameworks. MAS has outlined the need for strong governance models, with every stablecoin issuer needing identifiable board members and stakeholders who can be held accountable. PFMISA elaborates that systemically important stablecoin arrangements should have well-defined governance structures, including identifiable legal entities.
Similar to FSB’s focus on risk management, PFMISA recommends regular risk assessments and comprehensive risk management frameworks. MAS also emphasizes annual comprehensive risk assessment protocols involving scenario planning and stress testing to ensure issuers are prepared for economic downturns or potential market crashes.
PFMISA advises that settlements in financial transactions should be final and irrevocable, an aspect yet to be explicitly covered by MAS but closely aligned with FSB’s recommendations. MAS indirectly requires that settlements be final and irrevocable, aligning with international standards.
MAS and PFMISA highlight the importance of minimal credit or liquidity risks in the settlement assets.
MAS notes challenges with decentralized stablecoins, which also resonate with PFMISA’s acknowledgment that stablecoin arrangements with decentralized governance warrant special attention.
MAS aims to designate systemically important stablecoins under specific acts, which aligns with PFMISA’s framework for determining systemic importance based on size, nature, interconnectedness, and substitutability.
?Other Regulatory Aspects Under MAS
MAS distinguishes between bank and non-bank issuers. Non-bank issuers that circulate Single-Currency Stablecoins under S$5 million won't require a Major Payment Institution license. Conversely, banks that issue stablecoins as tokenized liabilities are already regulated under the Banking Act.
Stablecoins in Singapore won’t be insured, separating them from traditional bank deposits. Additionally, MAS intends to restrict stablecoin issuers from paying interest on deposited cash related to stablecoin issuance.
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MAS has expressed concerns about the impact of stablecoins on Singapore’s financial stability and monetary sovereignty, and it is closely monitoring these assets.
MAS aims to regulate stablecoin-related activities under the Payment Services Act, including services like token exchanges and wallet providers, under its regulatory oversight.
MAS also explored the possibility of multi-jurisdictional issuance of Single-Currency Stablecoins. However, feedback indicated that regulatory challenges could arise from multiple jurisdictions. As a result, to be recognized as an “MAS-regulated stablecoin”, Single-Currency Stablecoins should be issued solely from Singapore.
Stablecoin Regulation in Other Jurisdictions: The Case of Japan
Japan has also been proactive in regulating stablecoins. In June 2022, Japan’s House of Councillors passed the revised Payment Services Act, which targets stablecoins for legal regulation. The Act is comprehensive and consists of three key elements:
In Japan, stablecoins are classified into “collateralized” and “uncollateralized” types, with regulations primarily affecting the collateralized category. Only authorized institutions such as banks and trust companies can issue collateralized stablecoins.
Any entity involved in trading or managing stablecoins must be registered under a regulatory body. This ensures that intermediaries are accountable and adhere to national standards.
The Japanese Financial Services Agency has introduced “foreign exchange transaction analysis” as a new business category to combat money laundering. Institutions dealing with stablecoins must register under this system and are subject to stringent reporting requirements.
Conclusions
As stablecoins continue to evolve, the harmony between international frameworks—such as those established by the FSB and PFMI—and localized regulations like those from Singapore’s MAS and Japan’s revised Payment Services Act becomes increasingly important. These regulatory schemes lay a robust foundation for a harmonized approach that adeptly addresses both the unique challenges and opportunities presented by stablecoins. As both international and local regulatory authorities refine their guidelines, they are setting the stage for stablecoins to emerge as secure, reliable, and indispensable components of our digital financial ecosystem.
By taking prudent steps in the regulation of stablecoins, both Singapore and Japan have not only fortified their own financial systems but also set the stage for other jurisdictions to develop informed regulatory approaches. Their experience will likely serve as a blueprint for stablecoin regulations in other countries in the near future. As stablecoins continue to gain market traction, the spotlight will shift towards how these regulations adapt to ever-changing market dynamics and whether other countries will follow suit in adopting similar frameworks.
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