Should Stablecoins be regulated by the Central Bank? The Mauritius Case
Stablecoins are digital assets pegged to stable assets like fiat currencies,cash & cash equivalents, loans, bonds etc and sometimes pegged against algorithmic reserves like volatile cryptocurrencies. This presents unique challenges and risks that justify proper supervision by central banks or non-banking regulators. We have got a very bad experience with the Terra Luna case where holders of USTs have lost their investments. One genuine question is whether we should allow Stablecoins backed by algorithmic reserves or not?
Another important question is: Should stablecoins be regulated by the Central Bank or non-banking regulators? In Mauritius, there was a draft guideline note that was issued by the Financial Services Commission on 24th July 2023 and now, in the latest Budget Speech 2024-2025, the Finance Minister of Mauritius has announced that the National Payment Systems Act will be amended to:
(a) provide the Central Bank the flexibility to specify the instruments that will qualify as a payment instrument under the National Payment Systems Act and to align with the Virtual Asset and Initial Token Offering Services Act;
(b) extend the authority of the Central Bank to authorise a person to operate a clearing system or settlement system;
(c) empower the Central Bank to grant in-principle approval to an applicant, under the National Payment Systems Act, to operate a payment system, clearing system or settlement system or to act as a payment service provider;
It is understood that Stablecoins would most probably fall under the regulatory purview of the Central Bank and not the Financial Services Commission.
Here are the potential primary reasons for supervision by the Central Bank:
1. Financial Stability
Stablecoins can have a significant impact on the broader financial system. Large-scale adoption could potentially lead to systemic risks if not properly managed. For instance, if a major stablecoin issuer fails or faces a sudden loss of confidence, it could trigger a broader financial crisis. Central banks, with their mandate to ensure financial stability, are best positioned to oversee and mitigate these risks.
2. Consumer Protection
Central banks can implement and enforce regulations that protect consumers. Stablecoins, if not adequately supervised, could expose users to risks such as fraud, loss of funds, or inadequate reserves backing the stablecoin. Central banks can ensure that issuers maintain sufficient reserves and adhere to strict operational standards, thereby protecting consumers.
3. Monetary Policy
Stablecoins can influence the effectiveness of a central bank’s monetary policy. If stablecoins become widely used, they could affect the money supply and the central bank's ability to control interest rates and inflation. Central bank supervision can help ensure that stablecoins complement rather than undermine monetary policy.
4. Preventing Financial Crime
Stablecoins can be used for illicit activities, including money laundering and terrorism financing, due to their digital and sometimes pseudonymous nature. Central banks can work with other regulatory bodies to enforce anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations, ensuring that stablecoin transactions are monitored and reported. With regulation of Stablecoins, there won’t be any pseudonymous wallet and all users and issuers would be known as they would need to provide their KYC documents for proper compliance and due diligence purposes.
5. Regulatory Uniformity
Central bank supervision can ensure a uniform regulatory approach to stablecoins. Without central oversight, the regulatory landscape might become fragmented, with different jurisdictions implementing varying rules. This could lead to regulatory arbitrage, where issuers choose jurisdictions with the least stringent regulations, potentially increasing risks. Central bank oversight can help create a coherent and consistent regulatory framework.
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6. Integration with the Traditional Financial System
Stablecoins that are integrated with the traditional financial system need to be interoperable with existing financial infrastructures. Central banks can facilitate this integration, ensuring that stablecoins operate smoothly alongside traditional payment systems, enhancing efficiency and stability in the financial system.
7. Innovation and Trust
Central bank supervision can foster innovation by providing a clear regulatory framework that encourages responsible development of stablecoin technologies. This can enhance trust among consumers and investors, promoting wider adoption of stablecoins while ensuring they are safe and reliable.
Conclusion
The supervision of stablecoins by central banks is crucial to ensure financial stability, protect consumers, maintain the efficacy of monetary policy, prevent financial crime, ensure regulatory uniformity, integrate with traditional financial systems, and foster trust and innovation. Central banks, with their extensive expertise and mandate to safeguard the financial system, are uniquely positioned to oversee the stablecoin market effectively.
It is a bold decision by the Mauritius Government to shift the responsibility of the regulation of Stablecoins from the Financial Services Commission to the Bank of Mauritius and this without diminishing the role of the Financial Services Commission which has been playing a crucial role in regulating Virtual Asset Service Providers in Mauritius. Important to highlight that these measures will need to be approved by the Parliament of Mauritius and be gazetted to be effective. This shows the seriousness of the Mauritius jurisdiction to regulate Stablecoins. These measures will definitely increase the attractiveness of Mauritius as an international fintech/Crypto hub. Will the next move be about granting approval for Bitcoin and Ethereum ETFs? Let’s wait and see.
Written by
Benito Elisa
Founder & CEO, Wakanda 4.0 Ltd
Mauritius
Email: benito@wakanda.tech
Web: www.wakanda.tech
18th June 2024
Senior Manager - Financial Services Commission, Mauritius
6moNot sure if the statement made herein your article, i.e "It is a bold decision by the Mauritius Government to shift the responsibility of the regulation of Stablecoins from the Financial Services Commission to the Bank of Mauritius..." is factually appropriate. It depends for what purposes the Stablecoins will be used for, in practice. Depending on the purposes, the relevant laws and prudential/market conduct requirements would apply to the applicants. This is what the legislations provide for, so far. Moreover, the reasons/objectives, as set out in your article, are all very important and will be addressed by the regulators by virtue of their existing regulatory/supervisory mandates and/or through regulatory cooperation between themselves, where applicable.
Operations & Risk Management and Data Analytics
6moThank you for your post. Please note the following: I. FSC Mauritius also has the mandate of ensuring the soundness and stability of the financial system in Mauritius in collaboration with the BoM (financial stability). II. Consumer Protection including Preventing Financial Crimes are also part of the responsibilities of the regulator of the non-bank financial services sector in Mauritius. III. You are incorrect to say thar it will be a shift of the responsibility of who to regulate Stablecoins - rather depending on how stablecoins will be used, either BoM or FSC Mauritius will regulate the relevant activity. Relevant guidelines will be issued in due time by the regulators. Already the budget speech 2024/25 gives you an idea when BoM will be regulating Stablecoins - proposed amendments in the NPS Act as you already highlighted in your post.