The Financial Stability Board (FSB) recently published its global regulatory framework (Framework) for crypto-asset activities to promote the comprehensiveness and international consistency of regulatory and supervisory approaches.
This Framework consists of two sets of recommendations for:
the regulation, supervision and oversight of crypto-asset activities and markets; and
the regulation, supervision, and oversight of “global stablecoin” arrangements.
The Framework is based on the principle of “same activity, same risk, same regulation”. This initially draws concerns, as it doesn't inherently recognise that "same regulation" may fail when decentralised technology is considered. At a recent conference in Sydney, the suggestion was made that "tailored regulation, same outcome" may be a better approach, however the FSB has still included an express element of flexibility which still permits customisation of regulation and could leave a "same outcome" end goal intact.
While this may seem pedantic, the approach is critically important when there are calls by some for all of the crypto-asset industry to be dealt with under existing laws strictly, which would amount to a ban, should crypto-assets be declared financial products / securities without a workable licensing framework in place. Recently a project in the US which testified before Congress that they were compliant was shown up to have no trading and no assets available for sale, despite claiming they were an example of a compliant path under existing US securities laws.
The FSB approach shows clear TradFi influence, drawing on experiences in different jurisdictions to seek to establish a high-level, flexible and technology neutral framework.
The FSB says the Framework will:
ensur[e] that crypto-asset activities and stablecoins are subject to consistent and comprehensive regulation, commensurate to the risks they pose, while supporting responsible innovations potentially brought by the technological change.
In formulating this Framework, the FSB highlighted that events in the crypto-asset industry last year (e.g. the collapse of FTX and meltdown of Terra/Luna) illustrate the failure of a key service provider in the crypto-asset ecosystem can quickly spread to other parts of the ecosystem.
In light of these events, the FSB's recommendations focus on three main areas:
adequate safeguarding of client assets;
addressing risks associated with conflicts of interest; and
cross-border cooperation.
The safeguarding of client assets is a theme which will be familiar to many in the Australian blockchain scene as exchanges have been asking for regulation around crypto-custody for several years, well before the collapses of last year.
The FSB's mandate is to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Last February, the G20 asked the FSB to coordinate the delivery of an effective regulatory, supervisory and oversight framework for crypto-assets, including publishing the recommendations in this Framework by July 2023.
The Framework will provide input to a joint paper with the International Monetary Fund (IMF) to be delivered to the G20 in September 2023, which is aims to support a coordinated and comprehensive policy approach to crypto-assets by synthesizing IMF's work on macroeconomic and monetary issues and FSB's work on supervisory and regulatory issues. The IMF's approach will be closely watched to see if it takes a "same regulation" theme, risking an inflexible path, or emphasizes the tailoring required to deliver a technology-enabling regulatory framework.