Page 42 - PROJECT KHOKHA 2

IMPLICATIONS
Where an activity-based approach is followed, regulation of new forms of private ‘money’ should consider how existing forms of private ‘money’ are regulated, including prudential regulation as with commercial banks who issue private ‘money’ through credit extension. Since a DLT-based wToken could also be considered as a payment system in FMI parlance, further consideration would need to be given to the application of the PFMIs to such an arrangement, depending on its systemic importance. A systemically important stablecoin arrangement, primarily used for making payments (transferring tokens between users), would be expected to adhere to all the relevant PFMIs, in line with the recommendations from relevant international standard setting bodies. Some of the challenges stablecoin arrangements pose to PFMI compliance stem from its ability to use settlement assets
and not central bank or commercial bank money; the interdependency between multiple stablecoin arrangements; the level of decentralisation of operations and governance; and its ability to scale (CPMI-IOSCO, 2021: 4). An example of some of the pertinent PFMIs, including a subset identified in the recent consultative report by the Committee on Payments and Market Infrastructures (CPMI) and Board of the International Organisation of Securities Commissions (IOSCO) (2021), include:
• PFMI 1 requires an enforceable legal basis for all material activities. At present, this may be problematic in South Africa, until it is determined how a wToken would be defined in law.
This may include its treatment under the Financial Markets Act 19 of 2012 (FMA), the National Payment System Act 78 of 1998 and the future crypto regulatory framework, following on from the publication of the Crypto Asset Regulatory Working Group (CAR WG) policy position.
• PFMI 2 requires clear and transparent governance methods. Compliance with this principle would look quite different with more decentralised governance methods. The governance structure
of the wToken would have to show how it complies with the requirements, whereas regulators would have to gain an understanding of alternate governance models. The ownership structure and operation should allow for direct and clear lines of responsibility and accountability, for instance, being owned and operated by legal entities controlled by natural persons (CPMI-IOSCO, 2021: 5).
• PFMI 3 requires comprehensive risk management, including regularly reviewing risks material to the functioning of the wToken (stablecoin) arrangement and developing appropriate risk management frameworks and tools (CPMI-IOSCO, 2021: 5).
• PFMI 8, on settlement finality, requires clear and final settlement, irrespective of the operational settlement method used – which may include clearly defining the point at which technical settlement is achieved and making it clear where technical settlement is not aligned with legal finality (CPMI-IOSCO, 2021: 5).
• PFMI 9 requires settlement in central bank money – where practical and available. Therefore, where central bank money is available it may be difficult to justify the issuance of a wToken.
The principle, however, does not exclude the issuance of a wToken, but does, for instance, indicate that a key consideration, where central bank money is not used, is that the settlement asset should have little or no liquidity or credit risk. Considerations would include whether the arrangement provides its holders a direct legal claim on the issuer and/or any rights to the reserve asset for timely convertibility, at par, into liquid assets – including claims on a central bank (CPMI-IOSCO, 2021: 5).
From a national payment system perspective, allowing various alternative settlement system options may have an impact on liquidity in the SAMOS system, if money in settlement accounts is used to buy wCBDC and/or back wTokens. Similarly, introducing too many alternate options into the national payment system may fragment the system, unless a multi-settlement asset system can be created where different options ‘plug-and-play’ into the overall system.
42 PROJECT KHOKHA 2