Global regulators are working to make sure different countries' regulations around cryptocurrencies are sound and will not impact financial stability.
Critics have voiced concerns that cryptos, including so-called stable coins which are pegged to an asset pool or currency, could be used to finance terrorism or for money laundering. Regulators also want to protect consumers, who they say may not understand the risks associated with investing in cryptos.
Speaking at conference in Brussels, Randal Quarles, the head of the Financial Stability Board and vice chairman for supervision at the U.S. Federal Reserve, said the potential scale of crypto assets could bring regulatory challenges.
"This is an issue that can potentially affect every country in the world," he said.
Crypto regulation
He said the FSB has begun work to identify which regulations exist that apply to stable coins in various jurisdictions.
"Once that assessment is complete, we will report to the G-20 [forum of governments and central banks] on any appropriate actions that need to be taken to ensure that financial stability is not negatively affected by their introduction," he said. The FSB is responsible for monitoring the global financial system and making recommendations for changes.
Earlier this year Facebook Inc. unveiled a plan to introduce its Libra cryptocurrency — a type of stable coin— in 2020, prompting a backlash from authorities in several countries, including France, the U.K. and the U.S.
Market fragmentation
Other challenges for financial stability include the fragmentation of the markets, uneven application of new bank capital rules, and the future of interbank benchmark rates.
Some forms of market fragmentation may have financial stability benefits, such as reasonable loss absorbency requirements imposed on subsidiaries of global banks, Quarles said.
"But market fragmentation may also bring about unintended negative consequences, such as increased opportunities for regulatory arbitrage and cumulatively higher regulatory burdens for firms," he told the conference.
He said there had been some "uneven" progress on completing the Basel III framework for bank stability, with some jurisdictions not yet implementing the large exposures framework, the leverage ratio and the net stable funding ratio. These metrics can indicate how risky or financially troubled a bank may be.
He said the FSB will continue to push all its members for "full completion of these important measures."
Libor
Quarles also said the transition away from the discredited Libor interbank benchmark interest rate needed to be looked at in terms of financial stability, given the risk that it will not exist past 2021.
There had been a chance that a "rump panel" would have continued but Quarles said it does not look "fit for purpose." One key risk is around the legacy contracts that need to be worked out.
Libor fell into disrepute when employees of the panel of certain banks that submitted interest rates used in its composition were found to be manipulating the rate.
