The FSB Proposes Global Framework For Crypto-Assets — Fin Tech

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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:

  1. Reg­u­la­to­ry pow­ers and tools (both at nation­al and international 
    levels)

  2. Com­pre­hen­sive and pro­por­tion­ate reg­u­la­tion, super­vi­sions and 
    oversight

  3. Nation­al and inter­na­tion­al-lev­el cooperation

  4. Gov­er­nance frame­work and relat­ed dis­clo­sure requirements

  5. Risk man­age­ment framework

  6. Data man­age­ment frame­work and relat­ed reporting 
    requirements

  7. “Com­pre­hen­sive, clear and trans­par­ent” disclosure 
    requirements

  8. Reg­u­la­to­ry mon­i­tor­ing of inter­con­nec­tiv­i­ty and independence 
    with­in cryp­to-asset ecosys­tem as well as between such ecosys­tem and 
    wider finan­cial system

  9. 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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May­er Brown
arti­cle pro­vides infor­ma­tion and com­ments on legal 
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