On October 11, the Financial Stability Board (FSB) issued a proposed framework to strengthen the international regulation of crypto-asset activities and global stablecoin arrangements.
The proposals focus primarily on the risk of crypto-asset markets to financial stability, notably the risk of arbitration and fragmentation; and stressed the importance of a comprehensive regulatory framework commensurate with the risks they pose.
The Consultative Report of the International Regulation of Crypto-asset Activities sets out the key issues and challenges for the regulation and supervision of crypto-asset activities and markets and outlines the FSB’s proposed approach for establishing a comprehensive regulatory framework on the basis of the principle of “same activity, same risk, same regulation”.
Highlight of key issues and challenges
Regulatory powers and coverage: Include the availability and application of existing regulatory powers, specifically in relation to the treatment of crypto-assets and activities that pose, or potentially pose, risks to financial stability and that may not be within the jurisdictional regulatory perimeter.
DeFi protocols, non-identifiable entities and governance: Their extensive use which has contributed to opaqueness and a lack of accountability. Their use makes it difficult to identify the entities or natural persons that should be held accountable for good governance and regulatory compliance.
Cross-border cooperation: Arising, among other things, from differences in regulatory classification among jurisdictions.
Risk management related to wallets and custody services: Wallet services (custodial or non-custodial) are a key user interface that help safeguard the crypto-assets of users. Although,
- A non-custodial wallet service (allowing users to independently interact with a blockchain and its services) can be disrupted by a hardware failure or cyber incident and result with the loss or inaccessibility of cryptographic information and the permanent and irreversible loss of the crypto-assets. Non-custodial wallets are not regulated in most jurisdictions.
- Custodial wallet service providers are exposed to cyber incidents risks, hacking, fraud, reputational risks, counterparty risks to quote a few. If the crypto-assets are not properly segregated from the provider’s own liabilities, users may experience investment losses in the event the provider is insolvent or otherwise fails to uphold its obligations. Currently, custodial wallets may be partly regulated if certain functions.
Other challenges outlined in the Report are associated with risk management related to trading, lending and borrowing, data management and disclosure and the combination of multiple functions within a single service provider.
Set of nine high-level recommendations
To promote a consistent regulatory framework, the FSB’s recommendations focus on the following :
Regulatory powers and tools, and adequate resources to regulate, supervise, and oversee crypto-asset activities and markets.
General regulatory framework (effective regulation, supervision, and oversight)
Cross-border cooperation, coordination and information sharing
Governance (crypto-asset issuers and service providers to implement and disclose a comprehensive governance framework).
Risk management framework that comprehensively addresses all material risks.
Data collection, recording and reporting (crypto-asset issuers and service providers should have in place robust frameworks for collecting, storing, safeguarding, and the timely and accurate reporting of data).
Disclosures: crypto-asset issuers and service providers should disclose to users and relevant stakeholders comprehensive, clear and transparent information regarding their operations, risk profiles and financial conditions, as well as the products they provide and activities they conduct.
Addressing financial stability risks arising from interconnections and interdependencies
Comprehensive regulation of crypto-asset service providers with multiple functions
The Consultative Report on the regulation of “Global Stablecoin” Arrangements covers the recent market developments and the characteristics of existing stablecoins; the recent policy developments; as well as the FSBs Proposals to revise the High-level Recommendations.
More specifically, the FSB reviewed its set of 10 recommendations addressing the oversight of global stablecoins that were previously released in October 2020 and now taking into consideration recent market and policy developments.
Questions pertaining to both Consultative Reports are set out in this questionnaire, and responses should be sent to fsb@fsb.org by 15 December 2022.
The finalized version of the proposed recommendations are scheduled to be available by mid-2023