The use of physical payments continues to decline, and the future is digital with cryptocurrencies like stablecoin gaining popularity. With these new digital cash usages or digital coins, regulatory challenges arose. RRP landscapes can provide the legal grounds to protect financial markets, institutions, consumers.
The future is digital:
We are using less and less physical cash for payments. And our world gets more and more globalized and digital. Therefore, it is not surprising that digital forms for payments already evolved and continue evolving. They become a part of our daily life as some digital forms offer more handy and new(er) ways of transacting, investing and storing funds.
The stablecoin is one of these new digital forms of money, which is considered as:
- a bridge between traditional finance and the cryptosphere
- a digital, “third medium” for money
- a new category of a regulated form of money.
The objective of the stablecoin is to establish a “crypto-asset that maintains a stable value relative to a specific asset, or a pool or basket of assets”. Therefore, it is designed with a “stabilisation mechanism” to minimize major fluctuations in value and to address the high volatility of “traditional” crypto-assets by tying its value to the stablecoin's underlying(s). This is of great importantance to certain investors who would like to invest in crypto-assets but fear the high volatility of traditional crypto-assets, such as for example seen in the Bitcoin.
Recovery and resolution planning (RRP)
Recovery and resolution planning (RRP) has the purpose to strengthen the confidence in the financial market, its systems and to ensure financial stability without causing taxpayers to lose their money. This importance can again be seen on the latest FINMA resolution report 2022. RRP provides a legal, regulatory regime/framework spanned over financial market infrastructures (FMIs).
RRP for stablecoins:
RRP for stablecoins needs to address the full ecosystem of a stablecoin's payment system consisting of i.a. a stablecoin issuer, the reserve system as well as the designated dealers.
The stablecoin's business model, dependent on the respective national legislation – here, on the example of Switzerland – needs for the case of systemic relevance to maintain and provide to the regulator the following plans: Recovery plan, Emergency plan, Resolution plan and Solvent-wind down plan. These plans together help stablecoins and their payment system/business to
- stabelize itself in case of stress events (Recovery Plan),
- continue its systemic relevant business parts during stressing events/crisis (Emergency Plan),
- recapitalize/restructure and/or resolve parts/all of the Stablecoin's business (Resolution Plan)
- exit the market on a voluntary and/or forced basis (Solvent Wind-Down Plan).