Turmoil in the crypto market leads to tighter regulation, says watchdog FSB

Banks looking to deepen their crypto offerings may need to strengthen compliance, accounting and governance protocols, according to recently proposed recommendations from the Financial Stability Board.

The FSB, a Basel, Switzerland-based entity that coordinates with financial regulators globally, released proposed frameworks for regulating cryptoassets and stablecoins as a bleeding cryptomarket exacerbates the lack of regulatory transparency and mismatching of liquidity and maturity.

“This turmoil has once again underlined the need for a comprehensive approach to the regulation of cryptoassets,” FSB chief Klaas Knott said in a letter released alongside the reports. “The current ‘crypto winter’ has reinforced our assessment of existing structural vulnerabilities in these markets…These recommendations seek to promote the comprehensiveness and international consistency of regulatory and supervisory approaches.”

The FSB proposed nine recommendations for cryptoassets that would require banks and other companies to implement stricter, clear risk management protocols for digital assets, commensurate with the risk they pose. It also recommends separating services such as trading, lending and safekeeping into several units.

Stablecoins, cryptocurrencies linked to another asset such as the US dollar or gold, will see a watershed if the FSB’s ten recommendations for the currency are approved. The Swiss board’s report said most existing stablecoins would not meet the new recommendations due to their governance, risk management, redemption rights, stabilization mechanisms and disclosures.

Earlier this year, the FSB warned that the lack of regulation in crypto markets could pose a threat to the health of the global economy, but it walked back some of these concerns in its latest report. The board took the position that the interconnection of the crypto market could cause a chain reaction of stress among market participants.

The crash of stablecoin TerraUSD, bankruptcies of crypto lenders Celsius and Voyager and the rapid decline in Bitcoin and Ethereum values ​​this year have led other major regulators in addition to the FSB to warn about involvement with crypto.

The G20 finance ministers and central bank governors are reviewing the recommendations this week, and a public consultation period is open until 15 December. The FSB plans to finalize the recommendations by July 2023 and begin reviewing implementation in 2025. The FSB has no legal mandate or enforcement authority, and relies on peer pressure to administer guidelines.

The FSB’s published work reflects the consensus of its members, who represent financial regulators worldwide, including the Securities and Exchange Commission, the Federal Reserve and the US Treasury. The US-based Commodities Future Trading Commission and the Office of the Comptroller of the Currency contributed to the FSB’s cryptopolicy work.

Fed Deputy Chairman for Supervision Michael Barr said in a Wednesday speech that the banks should be careful about taking deposits from crypto firms due to the current volatility in the space.

“Many of these activities present new risks,” he said at a DC Fintech Week event, “and it is important for banks to ensure that any crypto-asset-related activity they conduct is legally permitted and that banks have appropriate measures in place to manage these risks.”

The lack of crypto regulation in the US has delayed banks’ involvement in crypto offerings. Barr added at the event that the Fed is working with the Federal Deposit Insurance Corporation and the OCC on regulations.

Earlier this summer, Richard Rosenthal, Deloitte’s chief banking officer and principal of digital assets, told American Banker that many banks were working on crypto plans until the OCC or FDIC provided more specific guidance.

However, some major financial institutions are staying the course. BNY Mellon announced this week that it had launched its digital asset custody platform, and Nasdaq last month announced its plan to enter the space next year. In March, the SEC issued Staff Accounting Bulletin No. 121, require institutions that deposit cryptoassets for their customers to carry this risk as a liability on the balance sheet.