What is the FSB report on crypto regulations?
What is the FSB report on crypto regulations?
The Financial Stability Board (FSB), a global financial authority, proposed a regulatory framework for cryptocurrencies to the nations with the 20 largest economies (known as 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 in October 2022 by the Chairman of the FSB ahead of meetings with key leaders in Washington, DC, as well as the upcoming 2022 global G20 summit. The report also includes a list of questions for public comment to help shape proposed regulations.
Important takeaways
- FSB focuses on cryptocurrency regulation, proposing tighter restrictions.
- Stablecoins – cryptocurrencies whose value is pegged or tied to the value of another currency, commodity or financial instrument – are seen in the report as the biggest risk to global financial stability among cryptoassets.
- The FSB report proposes “same activity, same risk, same regulation” for crypto-assets, which would mirror traditional financial supervision.
- The FSB cannot make policy, but it hopes to influence policymakers to adopt this crypto-regulatory framework.
Current regulatory issues for cryptoassets
The “International Regulation of Crypto-asset Activities” report first outlines the current challenges and risks of regulation in the cryptocurrency space, stating that “many crypto-asset activities and markets are non-compliant or unregulated.”
The report goes on to describe the reasons for a strong stance on crypto regulation. With the current “crypto winter” in full swing, investors have seen their holdings dwindle, and in some cases disappear, due to the risks taken by some crypto companies. The FSB states: “These vulnerabilities were compounded by a lack of transparency and disclosures, inadequate governance, inadequate consumer and investor protection and weaknesses in risk management.”
Stablecoins are in the crosshairs of the FSB report, “as they may pose significant risks to financial stability.” The FSB’s tough stance on stablecoins is consistent with its call for stablecoin regulation in July 2022. As stablecoins attempt to mirror the pricing of real assets (such as the US dollar), this is seen as a threat to today’s central banks and national financial systems.
The report also attempts to analyze some of the intricacies of the many functions of cryptoassets, as some cryptocurrencies are compliant with current regulations, while others are not. Another challenge is the lack of classification for cryptoassets, which makes regulation difficult.
One of the biggest challenges is that crypto companies can offer several use cases (such as trading, lending, custody and brokerage services) that should be regulated individually. Traditional financial companies that offer these services are typically regulated as discrete providers of the services, rather than under a single corporate umbrella.
Finally, the report states that “the cross-border nature of crypto-assets raises regulatory, supervisory and enforcement challenges.”
The FSB is calling for international cooperation to create a coherent regulatory framework for cryptoassets that can be used in multiple jurisdictions around the world.
Proposed approach for a regulatory framework
The FSB proposes an approach to building a regulatory framework for cryptoassets, starting with the principle of “same activity, same risk, same regulation.” This means applying existing regulations from the traditional financial world to crypto-assets and crypto-companies that offer financial services, such as lending, trading and brokerage services.
There are two main proposals in the report:
Regulation and supervision: The FSB is building a comprehensive set of proposed recommendations for “regulation, oversight and supervision of crypto-asset activities and markets.” These recommendations will continue to evolve, but are designed to help G-20 countries create clear international rules to govern all cryptocurrencies and intermediaries (such as crypto exchanges).
Addendum to the “Stablecoin Event”: The Stablecoin Arrangement is a document created by the FSB that includes a number of updates in the latest proposal, including “requiring these stablecoin issuers to provide robust legal requirements, guarantee timely redemption at par in fiat, and maintain effective stabilization mechanisms, among other revisions.” ” Effectively, the FSB recommends centralization of stablecoin governance, with responsible parties for regulation, as well as guaranteed timely redemption for users wishing to exchange to fiat currency.
The FSB is calling on the G-20 nations to take crypto regulation seriously, and act quickly to introduce the same regulations that traditional financial markets have on crypto assets. The board also calls for regulation unique to cryptocurrencies, as some of their uses and functionality are much different than some traditional assets.
What is the Financial Stability Board (FSB)?
The Financial Stability Board (FSB) is an agency that acts as a watchdog for the global financial system, providing regulatory guidance to central banks and policy makers worldwide. The goal of the FSB is to create financial stability in international financial markets. While the FSB is designed to help all the world’s economies, it regularly reports to the G-20, which comprises the 20 largest economies in the world.
Can the FSB regulate cryptocurrencies?
No. But the FSB is responsible for monitoring global financial markets and making official recommendations to the largest economies in the world on financial regulations. This includes recommendations regarding the regulation of cryptocurrencies and crypto-related companies.
The bottom line
The FSB report says the regulatory proposals will be finalized by mid-2023. These proposals will provide clear direction for regulators and policymakers on how to legally rein in cryptocurrencies and intermediaries that provide crypto-related services. While the FSB is focused on crypto market activities and stablecoins, it will continue to monitor the activities of decentralized finance (DeFi) markets and companies as well.
The FSB takes a hard line on crypto, especially stablecoins, due to the enormous risk associated with such fixed assets. It specifically calls out Terra (LUNA) as it is the most extreme example to date of a highly risky stablecoin collapsing and wiping out billions in value seemingly overnight. The FSB will continue to provide guidance to global financial regulators before finalizing these regulatory proposals in 2023.
