Stablecoins will not meet impending regulatory standards, the chair of the Financial Stability Board (FSB) has warned.
They underpin the crypto-sector, providing a relatively non-volatile parking space for investor profits as most cryptocurrencies can be traded for them.
Head of fintech at the Bank of England Varun Paul told Yahoo Finance UK that commercial banks will soon begin issuing their own pound and dollar-backed stablecoins.
Alongside central bank digital currencies, these innovations of the blockchain-space could be about to become widely used.
However, the chair of the FSB released a statement on Monday giving a stark warning to officials in global finance that existing stablecoins "do not meet international standards".
The FSB, which is a Bank of International Settlements-affiliated advisory board, is set to release its final recommendations on global crypto asset regulation and supervision in July.
FSB chair Klaas Knot, in a letter addressed to the G20’s finance ministers and central bank governors, on Monday said: "Importantly, the FSB’s work concludes that many existing stablecoins would not currently meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed Bank of International Settlements Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance.”
He added: "This year, the FSB will finalise its recommendations for the regulation, supervision and oversight of crypto-assets and markets and its recommendations targeted at global stablecoin arrangements, which have characteristics that may make threats to financial stability more acute."
Majority of crypto app users have made losses on their bitcoin holdings, BIS report
The news comes after the Bank of International Settlements (BIS) said in a report that the majority of crypto app users have made losses on their bitcoin holdings over the past seven years because of events like 2022's collapse of the FTX exchange which saw $2tn (£1.66bn) wiped from the crypto market.
On Monday the BIS released an analysis of whether crypto investors made or lost money during the period from August 2015 to December 2022, during which bitcoin's (BTC-USD) price rose from $250 to $69,000, only to collapse to a low of $16,000 after the FTX bankruptcy in November 2022.
Check: Crypto live prices
Monday's BIS bulletin found that when the 2022 collapses of Terra/Luna and FTX were taken into account, "the majority of crypto app users in nearly all economies made losses on their bitcoin holdings".
The implosion of several crypto-entities in 2022 wiped $2tn from the cryptocurrency market cap and saw popular digital coins such as bitcoin plummet far below their 2021 highs. The majority of losses were felt by retail investors who had downloaded crypto-exchange apps such as Coinbase (COIN), Binance and the now bankrupt FTX.
The BIS report looked at the number of users downloading crypto exchange apps and found that most of these downloads occurred when the price of bitcoin was above $20,000.
The report then approximated that retail investors would likely buy at least $100 worth of bitcoin on the date of download.
This led the BIS to infer that, "in nearly all economies in our sample, a majority of investors probably lost money on their bitcoin investment.
"The median investor would have lost $431 by December 2022, corresponding to almost half of their total $900 in funds invested since downloading the app.
"Notably, this share is even higher in several emerging market economies like Brazil, India, Pakistan, Thailand and Turkey."
The report questioned whether the crypto-turmoil of 2022 posed any systemic risk to broader, traditional financial markets. It found that crypto shocks, like those of FTX and Terra/Luna, have a limited impact on equity prices or broader financial conditions.
The report said that there is, at best, a weak correlation between broader stress in the world of traditional finance and crypto losses.
Crypto enthusiasm shows no sign of waning
The BIS said that despite crypto’s high price volatility and the lack of substantial real-world use cases, investment inflow from retail investors has increased.
The report added that crypto trading activity had increased markedly despite the collapse of the Terra/Luna algorithmic stablecoin in May and the FTX bankruptcy in November of 2022.
It said: "The monthly average number of daily active users grew from around 100,000 to more than 30 million globally, during the rapid price increases in late 2017 and early 2021, around 100 million and 500 million new users joined."
The BIS said the increased market activity since the implosion of the Bahamian-based FTX cryptocurrency exchange was notable for a pattern of larger, more sophisticated investors selling and smaller retail investors buying.
"Nevertheless, despite crypto's large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class," the BIS said.
The report described a pattern of user numbers increasing as the price of bitcoin rose, but that the influx of new investors lagged behind the rising price suggesting that "users enter the system attracted by high prices and in the expectation that prices will continue to go up".