Klaas Knot, Chair of the Financial Stability Board (FSB), recently addressed the 93rd G30 Plenary, discussing the intersection of financial innovation and stability. He emphasized that the FSB's role is not to choose winners but to ensure that innovation develops safely within public policy objectives.
Knot highlighted two main aspects when considering innovation and stability: the rapid adoption of new technologies and their cross-border nature. He cited Facebook's 2019 announcement of a blockchain-based stablecoin payment system, Libra, as an example that underscored these issues. Although Libra never launched, it prompted a strong global regulatory response due to its potential systemic implications.
The FSB has been central in shaping the global response to such challenges through two main pillars. The first involved developing high-level recommendations for stablecoins, initially published in 2020 and revised in 2023. These recommendations aim to ensure stablecoins do not undermine financial stability. The second pillar is the G20 Cross-Border Payments Roadmap, which seeks to enhance user experience in cross-border payments amid de-risking by traditional financial systems.
Stablecoins present both opportunities and risks for cross-border payments. They could address some challenges but also introduce new risks. Knot questioned whether stablecoins would replace traditional bank-based payments or remain niche solutions within a fragmented ecosystem.
He noted that while stablecoins promise faster and cheaper payments, their core functions are similar to traditional financial instruments like e-money or bank deposits. Despite these similarities, stablecoins often operate outside existing regulatory frameworks. This situation underscores the importance of applying equivalent regulatory standards based on the principle "same activity, same risk, same regulation."
Knot warned against potential risks if stablecoin reserves fund riskier ventures without strict oversight. To mitigate such risks, the FSB has established guardrails for regulating and supervising stablecoins with consistent implementation across jurisdictions crucial to prevent regulatory arbitrage.
Beyond stablecoins, improving cross-border payments remains a focus for the FSB in collaboration with other stakeholders like the Committee on Payments and Market Infrastructures (CPMI). They work towards aligning technical standards and legal frameworks despite persistent inefficiencies in cross-border transactions.
In conclusion, Knot stressed balancing innovation with financial stability as crucial while fostering global coordination and vigilance against fintech-related risks. Authorities must build a resilient financial system embracing innovation while ensuring inclusivity and trust by adhering to "same activity, same risk, same regulation" principles.