Thinking | 15 July 2022

Financial Stability Board weighs in on international regulation and supervision of crypto-asset activities

By John Bassilios

The Financial Stability Board has recommended that crypto-assets and markets be subject to effective regulation and oversight in proportion to the risks they pose, both at the domestic and international levels. The FSB is an international body that monitors and provides recommendations about the global financial system. Its statement follows the release of the Financial Action Task Force’s recent review standards, as discussed in our previous article. We summarise the FSB’s recommendations and comment on what they mean for crypto-asset providers.

Takeaways from the FSB’s statement

  • Crypto-assets, including so-called stablecoins, are fast-evolving:
    • recent market turmoil highlights their intrinsic volatility, structural vulnerabilities and increasing interconnectedness with the traditional financial system. The failure of a market player – in addition to imposing large losses on investors and threatening market confidence arising from crystallisation of conduct risks – can also quickly transmit risks to other parts of the crypto ecosystem. It may have spill-over effects on traditional finance, such as short-term funding markets. An effective regulatory framework must ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of crypto-assets and harnessing potential benefits of the technology behind them.
  • Crypto-assets and markets must be subject to effective regulation and oversight commensurate to the risks they pose, both at the domestic and international level:
    • stablecoins and other crypto-assets must adhere to existing requirements where regulations apply to address the risks these assets pose. Crypto-assets may perform an equivalent economic function to that performed by the traditional finance. Accordingly, they are subject to regulations applicable to the underlying economic and financial nature of crypto-assets, in line with the principle of ‘same activity, same risk, same regulation’.
  • Crypto-asset service providers must at all times ensure compliance with existing legal obligations in the jurisdictions in which they operate:
    • crypto-assets service providers must comply with all regulatory, supervisory and oversight conditions of a particular jurisdiction before commencing any operations. In the event of any uncertainty, they should consult domestic regulators to ensure compliance.
  • The recent turmoil in crypto-asset markets highlights the importance of progressing the ongoing work of the FSB and the international standard-setting bodies to address the potential financial stability risks posed by crypto-assets, including so-called stablecoins:
    • FSB will continue to assess the global crypto-asset markets to facilitate and supervise the relevant risks, policies and standards with international standard-setting bodies and national financial authorities. This may involve assessing existing relevant standards, identifying any gaps within the current standards, and developing new standards that will assist in addressing new risks.
  • Stablecoins should be captured by robust regulations and supervision of relevant authorities if they are to be adopted as a widely used means of payment or otherwise play an important role in the financial system:
    • stablecoins that enter the mainstream financial system and are widely used as a means of payment or store of value in multiple jurisdictions could pose significant risks to financial stability in the absence of adequate regulation. Such stablecoins need to be held to high regulatory and transparency standards, maintain at all times the reserves that preserve the stability of value and meet relevant international standards.
  • FSB members support the full and timely implementation of existing international standards:
    • FSB member authorities will implement relevant international standards and best practices of international standard-setting bodies into national regulatory and supervisory frameworks to fill in any gaps. Examples include Financial Action Task Force (FATF) Recommendation 15 (registration/licensing from an anti-money laundering and counter-terrorism financing act standpoint) and FATF Recommendation 16 (the travel rule)).
  • The FSB is working to ensure that crypto-assets are subject to robust regulation and supervision. In October, the FSB will report to the G20 Finance Ministers and Central Bank Governors on regulatory and supervisory approaches to stablecoins and other crypto-assets.
    • The FSB will submit to that meeting a public consultation report on the review of its high-level recommendations for the regulation, supervision and oversight of ‘global stablecoin’ arrangements, including how existing frameworks may be extended to close gaps and implement the high-level recommendations.
    • The FSB will also submit a public consultation report that proposes recommendations for promoting international consistency of regulatory and supervisory approaches to other crypto-assets and crypto-asset markets and strengthening international cooperation and coordination.
    • These combined efforts of the FSB and the international standard-setting bodies are aimed at minimising the risk of fragmentation and regulatory arbitrage. FSB members welcome the guidance of the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO), Application of the Principles for Financial Market Infrastructures to stablecoin arrangements, which is a major step forward in applying ‘same activity, same risk, same regulation’ to systemically important stablecoins that are used primarily for making payments.
    • FSB members also support the Basel Committee on Banking Supervision’s ongoing work on the prudential treatment of banks’ crypto-asset exposures and IOSCO’s ongoing work on Decentralized Finance (DeFi) and crypto assets through its FinTech Taskforce, including the published IOSCO Decentralized Finance Report. While focusing primarily on investor protection and market integrity, IOSCO’s work aims at reducing vulnerabilities and supports the FSB’s coordinated efforts to address financial stability risks associated with the crypto-asset ecosystem.

What does this mean?

Recent market turmoil has increased the momentum at which global organisations will coordinate the regulation of crypto assets, particularly for globally significant stablecoins and otherwise adhering to the same activity, same risk, same regulation principle for crypto assets.

This article was written with the assistance of Gabrielle Terliatan, Seasonal Clerk.

Contact

John Bassilios

John Bassilios

Partner, Fintech and Blockchain Lead

John has broad experience in financial services, funds management, blockchain, corporate and corporate law.

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