FSB Sharpens Focus on Stablecoins and NBFI, Saying They Raise Vulnerabilities

The Financial Stability Board plans to sharpen its focus on stablecoins and nonbank financial intermediation (NBFI), two areas that it said could represent vulnerabilities in the global financial system.

The FSB announced these initiatives in a press release about a meeting it held Tuesday and Wednesday (Nov. 18-19) in Saudi Arabia.

During the meeting, FSB members called for continued close monitoring of the connections between crypto assets and stablecoins and the broader financial system, according to the release.

“Stablecoins may improve payment speed and efficiency, but they raise a number of vulnerabilities, including run risk and regulatory challenges associated with multi-jurisdiction issuers of stablecoins, which require continuing attention,” the release said.

The FSB said in October that jurisdictions should fully and consistently implement the FSB Global Framework for Crypto-asset Activities to eliminate gaps and inconsistencies that currently exist.

Following a peer review of progress in implementing this 2023 global framework, the FSB said in October that jurisdictions had made progress in regulating crypto-asset activities, had made less progress in regulating global stablecoin arrangements, and had left gaps and inconsistencies that “could pose risks to financial stability and to the development of a resilient digital asset ecosystem.”

At the FSB’s recent meeting, members also discussed the organization’s efforts to enhance the resilience of the NBFI sector, according to the press release.

The NBFI ecosystem includes investment funds, insurance companies, pension funds and other financial intermediaries, per the FSB’s website.

“Members noted that nonbank entities are increasingly important participants in the markets for government debt, but their use of highly leveraged trading strategies could amplify market volatility and instability, potentially across borders, in the event of a rapid unwinding of positions,” the FSB said in the release.

At the meeting, members supported further work to implement FSB’s recommendations on liquidity management by open-ended funds and on NBFI leverage, according to the release.

Members also said there is a need to address data gaps related to leveraged trading strategies in sovereign bond markets and to assess vulnerabilities, interlinkages and data gaps related to private credit.

The FSB said in July that regulators should consider limits on leverage used by NBFIs while also taking steps to limit their size.