G7 Report: How Should Regulators and Central Banks React to Global Stable Coins such as Libra?

On October 18, 2019 the G7 Working Group on Stable Coins has released a remarkable report about the benefits, challenges of and rules for (global) stable coins. Stable coins are a broad topic ranging from the Euro or the US dollar on the blockchain to Facebook’s Libra initiative. The authors argue that stable coins can be useful instruments to increase financial inclusion and to address frictions in the payment sector if challenges, e.g. with respect to governance, financial integrity, safety, financial stability and competition are properly addressed. Central banks are encouraged to act now and to develop road maps, how they aim to increase financial inclusion and how to increase efficiency in the worldwide payment sector. Further, the authors stress that regulatory authorities have to cooperate to set proper guidelines for global stable coins. — Authors: Jonas Gross, Philipp Sandner

Key benefits and risks of stable coins

What is the main content of the report? First, the benefits of stable coins are explained. The authors argue that stable coins can be seen as financial innovations, which have the potential to foster faster and cheaper worldwide payments. Simply put: The authors admit that stable coins have the potential to disrupt the payment sector. Stable coins are a broad topic ranging from the Euro or the US dollar on blockchain to Facebook’s Libra initiative. They can simply remain a “stable” coin or — if E-Money rules apply — turn into the digital Euro on a blockchain system.

Such statements coming from central bankers are impressive since central bankers are often criticized for being conservative and very cautious with respect to financial innovations.

However, the authors argue that stable coins are a nascent appearance and are largely untested. Various challenges have to be taken into account to exploit the full potential of stable coins.

Challenges for public policy and regulation

  • Legal certainty: The legal basis of the stable coin should be clear and transparent in all relevant jurisdictions.
  • Sound governance: A sound governance has to be established before starting a stable coin’s Operation.
  • Financial integrity: The highest international standards with respect to anti money laundering (AML) and counter-terrorism financing (CTF) have to be applied.
  • Safety, efficiency and integrity of payment systems: Safety and efficiency of payment systems have to be ensured by effective technology-neutral Regulation.
  • Consumer/investor protection: Consumers and investors have to be informed of all material risks and their individual obligations.
  • Fair competition in financial markets: Competition in financial markets should not be undermined and interoperability with other payment systems has to be supported.
  • Financial stability: Financial stability has to be ensured with global stable coins. Risks related to credit risks, maturity and liquidity mismatch, or operational risks, which could lead to bank runs, have to be addressed.

Complying with these rules, stable coins can exploit its full potential and should be approved by regulators.

How to regulate stable coins?

How should central banks react?

What about Libra?

From our perspective, the G7 report is a big step forward since it is now clearly stated, which rules global stable coins have to comply with. If analyzing these different rules, it does not seem to unrealistic that Libra in the end indeed fulfils all the necessary requirements to start its operations. And — as indicated by the answer from the Libra Association — the Libra Association also intends to comply with the rules.

What about traditional currencies the on blockchain?



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Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (email@philipp-sandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

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