The FSB Proposes Global Framework For Crypto-Assets — Fin Tech
On October 11, 2022, the Financial Stability Board (FSB) issued
a proposed framework to strengthen the international regulation of
crypto-asset activities and global stablecoin arrangements. As
noted below, these are proposals for now, and thus subject to
public comment and finalization. The proposals focus primarily on
financial stability and do not cover associated considerations and
risks such as data privacy, cyber security, national security or
consumer protection.
In summing up its objectives, the FSB explains that an
“effective regulatory framework must ensure that crypto-asset
activities are subject to comprehensive regulation, commensurate to
the risks they pose, while harnessing potential benefits of the
technology behind them.”
Current regulation and oversight of the crypto-asset ecosystem
is often inconsistent – both domestically and across borders
– and perceived by many as inadequate to address deficient
disclosure, the unique nature of crypto-assets and their
interconnectedness with the wider financial system.
As such, the FSB proposals aim to supplement and provide a more
holistic global lens for potential regulation and regulatory
harmony, including given the numerous proposals at national and
other local levels. However, as with all FSB actions, even if the
proposal is finalized by the FSB, it is unclear if, when, or the
extent to which member countries would adopt the FSB’s
framework. Nevertheless, the proposed framework signals where
global financial regulators perceive the need for regulatory
changes to account for digital assets.
Overview of the FSB’s Proposal
The FSB’s proposed framework is set out in two
proposals:
The proposals generally assume a growing correlation between the
crypto-asset market and the traditional financial system and aim to
provide a clearer regulatory regime, including so that crypto and
stablecoins do not create unacceptable risk to the financial system
at large. In doing so, the FSB notes that “many crypto-asset
activities and markets [currently] are not compliant with
applicable regulations or are unregulated.”
The FSB also contemplates regulating crypto-assets in a manner
consistent with other assets that serve the same purpose, in part
to reduce the risk of financing activities moving into unregulated
or less-regulated crypto-asset markets. To that end, the proposals
“are grounded in the principle of ‘same activity, same
risk, same regulation’ ”, meaning that “where
crypto-assets and intermediaries perform an equivalent economic
function to one performed by instruments and intermediaries of the
traditional financial sector, they should be subject to equivalent
regulation.”
While prepared as two separate proposal documents, the FSB views
the proposals as “closely interrelated, reflecting the
linkages between stablecoins and the broader crypto-asset
ecosystem.”
Interested stakeholders can submit comments to the two proposals
until December 15, 2022. The FSB expects to provide final proposed
recommendations by mid-2023.
Some highlights of the proposals include:
Crypto-Asset Ecosystem Report
The first proposal document, the Crypto-Asset Ecosystem Report,
sets forth nine recommendations to address the regulation,
supervision and oversight of the broader crypto-asset ecosystem.
These recommendations address the following topics:
- Regulatory powers and tools (both at national and international
levels) - Comprehensive and proportionate regulation, supervisions and
oversight - National and international-level cooperation
- Governance framework and related disclosure requirements
- Risk management framework
- Data management framework and related reporting
requirements - “Comprehensive, clear and transparent” disclosure
requirements - Regulatory monitoring of interconnectivity and independence
within crypto-asset ecosystem as well as between such ecosystem and
wider financial system - Comprehensive oversight of “crypto-asset service providers
that combine multiple functions and activities” (e.g.,
brokerage, lending, custodian, deposits, market-making,
distribution, settlement/clearing and promotion)
The Crypto-Asset Ecosystem Report also includes a chart tying
together the two FSB proposals and identifying which recommendation
in each proposal applies to a given crypto-asset activity. The
crypto-asset activities addressed by these proposals include: (a)
regulatory powers, (b) comprehensive oversight, © cross-border
cooperation, (d) governance, (e) risk management, (f) data
management, (g) recovery and resolution planning, (h) disclosures,
(i) monitoring of interconnections within the crypto-asset
ecosystem and with the wider financial system, (j) compliance
before operation, (k) redemption rights and stabilization
mechanisms, and (l) multiple functions.
Recommendations relating to crypto-asset activities identified
in (a)-(h) and (j) above are discussed in both of the FSB
proposals, whereas recommendations relating to the activities
identified in (i) and (l) are only addressed in the Crypto-Asset
Ecosystem Report, and recommendations relating to the activities
identified in (k) are only addressed in the Global Stablecoin
Report.
Global Stablecoin Report
By way of background, back on October 13, 2020, the FSB had published a proposal setting out 10
recommendations to address the oversight of global stablecoins.
1 These recommendations were subsequently reviewed by
the FSB together with other international organizations and
standard-setting bodies, and the FSB, through this second proposal
document – the Global Stablecoin Report – published
their findings. The current report includes proposed revisions to
the October 2020 FSB recommendations, taking into account recent
market and policy developments. 2
The FSB’s findings suggest that “significant
improvements” must be made to the “governance, risk
management, redemption rights, stabili[z]ation mechanisms and
disclosures” of “existing stablecoin arrangements”
in order to meet its recommendations. Among other things, the
Global Stablecoin Report seeks to set out a framework providing for
proper regulatory oversight of global stablecoin issuances,
including to address stabilization mechanisms, adequate reserves
and transparency.
Footnotes
1 As noted by the FSB, the definition of what
constitutes a “stablecoin” is not universally agreed;
however, the term “stablecoin” is commonly used within
the crypto-asset ecosystem. Generally, “stablecoins” are
distinguishable from other crypto-assets where they have “the
existence of a stabili[z]ation mechanism” and “usability
as a means of payment and/or store of value.”
2 See our prior discussion on guidance of certain
standard-setting bodies, which were identified by the Global
Stablecoin Report, including guidance issued by the Bank for
International Settlements’ Committee on Payments and Market
Infrastructures (CPMI) and the International Organization of
Securities Commissions (IOSCO).
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