Regulators propose first global rules before ‘crypto winter’ thaws

LONDON, Oct 11 (Reuters) – Crypto asset companies should set aside capital like banks when they carry out similar activities, regulators suggested on Tuesday in their first global rules as a “crypto winter” wiped $2 trillion from the sector, leaving investors with losses.

The Financial Stability Board (FSB), which coordinates financial regulation among the Group of 20 Economies (G20), made nine recommendations for members to apply.

At the moment, the sector is largely unregulated in most countries, only having to comply with anti-money laundering and anti-terrorist financing rules, as regulators warn investors that they risk losing every penny.

Klaas Knot, the Dutch central bank president who heads the FSB, said the “crypto winter,” or recent sharp downturn in cryptocurrencies, has reinforced the board’s assessment of existing structural vulnerabilities.

The FSB has said that crypto, which has a combined value of around $935 billion compared to $3 trillion at its peak last November, is not big enough to threaten financial stability, but rules were needed to regulate a likely recovery.

“Concerns about the risks they pose to financial stability are therefore likely to return sooner rather than later,” Knot said in a letter to G20 finance ministers meeting in Washington this week.

The FSB recommends putting in place a framework for the oversight and management of risk and data at crypto firms, and having plans in place for the smooth closure of crypto asset firms in trouble.

“Several cryptoasset lenders failed during the recent market turmoil as a result of vulnerability to runs, thin capitalization, concentrated exposure to risky entities and risky trading and business ventures,” the FSB said.

The proposals seek cross-border consistency in the regulation of crypto-assets, particularly as the EU finalizes ground-breaking rules to regulate the sector from 2024.

The underlying principle is that the same activity should be regulated in the same way, whether carried out by a crypto-asset company, bank or payment provider, and that crypto firms may need to separate some functions to ensure this, the FSB said.

The proposals have been out for public consultation until December 15, before being finalized in mid-2023, when FSB members are expected to speed up implementation.

The FSB also reviewed its guidance on the regulation of stablecoins, a type of cryptocurrency that is usually backed by a currency such as the dollar or assets.

The crash of the dollar-backed Terra stablecoin in May highlighted the high risk of loss and potential fragility of stablecoins that lack a stabilization mechanism, the FSB said.

The watchdog said most existing stablecoins do not meet its guidance, and it suggested revisions to the guidance include strengthening governance and stabilization mechanisms for stablecoins, and clarifying and strengthening redemption rights.

Reporting by Huw Jones; editing by David Evans

Our standards: Thomson Reuters Trust Principles.