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:
- International Regulation of Crypto-asset Activities: A proposed framework – questions for consultation(Crypto-Asset Ecosystem Report)
- Review of the FSB High-level Recommendations of the Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Consultative Report (Global Stablecoin Report).
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, (c) 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.
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).