Financial Stability Board Urges Tougher Crypto Regulation

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The Financial Stability Board (FSB) called for stronger regulations for cryptocurrencies after a year of scandals battered the industry’s reputation.

The FSB, a group of financial regulators with representatives from more than two dozen countries, published recommendations requested by G20 nations that if implemented may in future help prevent the misconduct that entities including FTX and Celsius have been accused of. The recommendations would ensure “consistent and comprehensive” regulation of the crypto industry and “incorporated learnings from events of the past year,” it said.

Global Regulatory Framework for Crypto-Asset Activities by FSB

The FSB made available two separate guiding documents and a press note to announce the final recommendations on July 17.

Our global regulatory framework for crypto-asset activities seeks to ensure that #cryptoassets and global #stablecoins are subject to robust regulation and supervision and do not pose risks to #FinancialStability.
Find out more: https://t.co/NZyA2rzF7K pic.twitter.com/wH8z4Q0d8l

— The FSB (@FinStbBoard) July 17, 2023

The document presents two sets of recommendations: one for the regulation of crypto-asset activities and markets, and another for standardizing global stablecoin arrangements. The recommendations aim to establish a global regulatory framework based on consistent regulation, risk assessment, and technology neutrality. The focus is on client asset security, mitigating conflicts of interest, and enhancing cross-border cooperation in the cryptocurrency industry.

The Financial Stability Board recommended that cryptocurrency platforms separate client funds from client digital assets to avoid conflicts of interest, and authorities should coordinate internationally for oversight. Privacy concerns should be addressed by ensuring responsible entities can be identified in decentralized finance (DeFi) procedures.

It also would require stablecoin issuers to have traceable and accountable governance bodies, and reserve assets must meet a minimum 1:1 ratio unless the issuer complies with adequate prudential requirements similar to commercial banks.

Check out our list of the best DeFi coins to buy.

Framework is not comprehensive

“The recommendations focus on addressing risks to financial stability, and they do not comprehensively cover all specific risk categories related to crypto-asset activities,” the FSB’s public note said. “They take account of lessons from events of the past year in crypto-asset markets, as well as feedback received during the public consultation of the FSB’s proposals.”

Now or Never: The Global Framework and Crypto Firms

The global crypto framework envisioned by FSB considered the inputs and feedback of various standard-setting bodies (SSBs) and international organizations. It also includes a shared work plan for the FSB and SSBs to work from 2023 onwards. The idea is to work collaboratively under their respective mandates to ensure monitoring, public reporting, and market coordination.

In the wake of the recommendations, crypto firms have no option but to introduce and adopt essential safeguards lest they should face harsh consequences like FTX, the FSB said.

“As recent events have illustrated, if linkages to traditional finance were to grow further, spillovers from crypto-asset markets into the broader financial system could increase,” it said. “Crypto-asset players need to stop operating outside the regulatory perimeter or in non-compliance with existing rules.”

The FSB acknowledged that the events of the past year exposed the vulnerabilities and volatility of crypto-assets and their associated entities, highlighting the potential for risks to spread throughout the ecosystem.

The FSB also recognized the possibility of crypto-assets integrating further into the broader financial system, prompting the G20 to assign the FSB with the task of establishing a comprehensive regulatory framework for crypto-assets, encompassing regulation, supervision, and oversight.

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