In its report on regulating cryptoassets, the Financial Stability Board (FSB) has called for a raft of measures, including data collection and reporting, cross-border cooperation, a governance framework, and regulatory power for authorities.
Globally agreed-upon rules leave crypto firms with no option but to introduce basic safeguards to prevent the blow-ups seen at FTX exchange and other crypto casualties, the Group of Twenty’s (G20’s) FSB said on Monday.
The FSB published on Monday the final recommendations requested by the G20 on supervising firms that trade cryptoassets such as Bitcoin. The watchdog also revised its existing recommendations for stablecoins in light of the demise of TerraUSD/Luna coins.
The FSB has drawn up a set of nine recommendations in its report on regulation, supervision, and oversight of cryptoasset activities and markets.
This report will be part of the synthesis paper being drafted along with the report of the International Monetary Fund on this subject as part of the ongoing G20 talks. The report, along with a note from the Presidency, will be shared before the G20 leaders’ summit in September.
The FSB report, while covering the risks to financial stability, has not addressed the key concerns of India around cryptoassets. The report also mentions that it does not comprehensively cover all specific risk categories related to cryptoasset activities, such as money laundering, combating the financing of terrorism, data privacy, cybersecurity, consumer and investor protection, market integrity, competition policy, taxation, monetary policy and sovereignty, and other macroeconomic concerns.
“As recent events have illustrated, if linkages to traditional finance were to grow further, spillovers from cryptoasset markets into the broader financial system could increase,” the FSB said.
Authorities should have and utilise the appropriate powers and tools with adequate resources to regulate, supervise, and oversee cryptoasset activities and markets, and enforce relevant laws and regulations effectively, the FSB said on Monday.
The FSB’s report has recommended that cryptoasset issuers and service providers be regulated on a functional basis and proportionate to the financial stability risk they pose, or potentially pose. This has to be in line with the principle of “same activity, same risk, same regulation”.
Such entities — cryptoasset issuers and service providers — should also be required to disclose a comprehensive governance framework with clear and direct lines of responsibility and accountability for all functions and activities they are conducting. They should also have an effective risk management framework in place that comprehensively addresses all material risks associated with their activities.
“The governance framework should be proportionate to their risk, size, complexity, and systemic importance, as well as to the financial stability risk that may be posed by the activity or market in which the crypto-asset issuers and service providers are participating,” the report observed.
Authorities should, to the extent necessary, achieve regulatory outcomes comparable to those in traditional finance, the FSB has said.
The report has also called for domestic and international cooperation for efficient and effective communication and information-sharing to encourage consistency in regulatory and supervisory outcomes.
Robust frameworks for collecting, storing, safeguarding, and timely and accurate reporting of data should be put in place by cryptoasset issuers, and the authorities should have access to the data as necessary.
Cryptoasset issuers and service providers disclose to users and relevant stakeholders comprehensive, clear, and transparent information regarding their governance framework, operations, risk profiles, and financial conditions, as well as the products they provide and activities they conduct.
The collapse of FTX in November 2022 highlighted vulnerabilities from crypto firms and the FSB said that all countries should apply the recommendations, even those that are not members of the watchdog.
FTX was based in the Bahamas, not an FSB member.
“Therefore, cryptoasset players need to stop operating outside the regulatory perimeter or in non-compliance with existing rules,” FSB Secretary-General John Schindler told reporters.
“These players can no longer argue there is a lack of regulatory clarity, as our framework makes clear the standards that should apply,” said Schindler.
The FSB stressed that there is also a need to identify and monitor the relevant interconnections within the cryptoasset ecosystem as well as with the wider financial system.
“Authorities should address the financial stability risks that arise from these interconnections and interdependencies,” it stated.
With inputs from Reuters
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