The Financial Stability Board (FSB), proposed a regulatory framework for cryptocurrencies to the G-20 nations, outlining concerns about crypto markets and activities. The proposal calls for stricter regulation of crypto assets, namely stablecoins, and a clear framework outlining risks and compliance for crypto regulation.
The report was submitted by the chairman of the FSB in October 2022 ahead of key meetings with leaders in Washington, D.C., as well as the upcoming G-20 worldwide summit for 2022. The report includes a list of questions to help shape proposed regulations.
The report, called International Regulation of Crypto-asset Activities, first delineates the present issues and dangers of guidelines in the digital currency space, expressing that “numerous crypto-asset activities and markets are not consistent with pertinent regulations or are unregulated.”
The report goes on to detail the reasons for a strong stance on crypto regulation. With the current crypto winter in full swing, investors have seen their holdings diminish—and, in some cases, disappear—due to the risks taken by some crypto companies. The FSB states that these vulnerabilities were amplified by factors such as a lack of transparency and disclosures, flawed governance, inadequate consumer and investor protections, and weaknesses in risk management.
Stablecoins have caught the attention of the FSB report, “as they could pose significant risks to financial stability.”5 The FSB wants stricter regulation on stablecoins by July 2022 because it sees stablecoins as a mirror pricing of real-world assets (such as the U.S dollar). This is seen as a threat to current central banks and national financial systems.
The report also tries to make sense of the many functions of crypto assets, as some cryptocurrencies follow current regulations while others do not. Another problem is that there is no official classification for crypto assets, making regulation more complicated.
A primary challenge is that crypto companies offer many use cases, such as trading and lending, which should be regulated individually. Finance companies that provide these services are generally regulated per service instead of under one company banner.
Lastly, the report states that “crypto-assets cross national borders, which raises regulatory, supervisory and enforcement challenges.”
The FSB’s proposed approach to creating a regulatory framework for crypto assets is to start with the principle of “same activity, same risk, same regulation.” This means financial regulations that exist in the traditional finance world would be applied to crypto assets and companies providing financial services like lending, trading, or brokerage.
The report contains two main proposals:
Regulation and oversight: The FSB is working on a set of proposed recommendations for regulating, supervising and overseeing crypto-asset activities and markets. These recommendations are still being developed, but they’re designed to help G-20 countries create clear international regulations for all cryptocurrencies and intermediaries (like crypto exchanges).
Additions to the Stablecoin Arrangement: The Stablecoin Arrangement is a document created by the FSB with revisions that would require stablecoin issuers to have robust legal claim, guarantee timely redemption at par into fiat, and maintain effective stabilization mechanisms. In other words, the FSB recommends centralization of stablecoin governance instead of having unaccountable parties for regulation. Users are also guaranteed timely redemption if they want to exchange into fiat currency.
The FSB is urging the G-20 nations to give thought to crypto regulation and create similar rules that oversee traditional financial markets. They also would like specific regulations on cryptocurrencies to be put into place because of how distinct their function and use are in comparison with other assets.
According to the FSB report, by mid-2023 it will have finalized proposals for regulating cryptocurrencies. This will give direction to legislators on how best to legally control digital assets and also companies that provide services related to crypto coins. The FSB is not only concentrated on stablecoins but DeFi markets too; though it plans continue monitoring firms involved in decentralized finance activities closely.
The FSB is taking a harsh stance on crypto, specifically stablecoins. It calls out Terra (LUNA) as the most egregious example of a highly risky unstable coin that collapsed and erased billions in value. The FSB plans to meet with global financial regulators soon to finalize these regulatory proposals before 2023.
KEY FACTS
- The Financial Stability Board is proposing tighter restrictions on cryptocurrency regulation.
- In the report, stablecoins—whose value is pegged to another currency, commodity, or financial instrument—posed the greatest risk to global financial stability among crypto assets.
- The FSB report suggests that regulating cryptocurrency assets should resemble how traditional finance assets are overseen.
- Although the FSB cannot establish policy, it aspires to persuade policymakers to adopt this regulatory arrangement for crypto.