The G20’s Financial Stability Board has introduced a new set of globally-agreed standards for crypto firms to follow. The policy recommendations published by the financial watchdog are set to supervise firms that deal with the trading of all crypto assets including stablecoins.
On Monday, the Financial Stability Board (FSB), an international body that monitors and makes policy recommendations on the global financial system, announced new laws that will force firms dealing with crypto assets to set up a primary safeguard to prevent future crypto casualties.
This comes in light of recent blowups like the FTX exchange and Terraform Labs’ TerraUSD/Luna stablecoin which negatively impacted the global crypto market.
The final recommendations published at the request of the G20 will supervise any firm that offers cryptocurrency trading services. Additionally, the FSB also updated its policy for stablecoin regulations after considering the demise of TerraUSD/Luna tokens in May 2022.
The announcement comes at a time when the influence of cryptocurrencies is growing on the global economic front.
Intrinsic Volatility And Structural Vulnerabilities Of Crypto Assets
In a statement following the announcement, the FSB illustrated how the events of the past year exposed the “intrinsic volatility” and “structural vulnerabilities” of crypto assets and related players.
The financial watchdog also highlighted that failure from the side of a key service provider in the crypto sector could quickly transmit risks to other parts of the ecosystem.
The G20 body also warned that if linkages to traditional finance were to grow further, there will be an increase in spillovers from crypto asset markets into the broader financial system, putting the global financial markets at risk.
Currently, a lot of crypto firms are non-compliant with existing rules or operate in jurisdictions outside the FSB’s regulatory perimeter. In the case of FTX, the company was headquartered in the Bahamas, which is not a member of the Financial Stability Board. This is all set to change with the latest crypto policy recommendations.
FSB has strengthened its high-level recommendations in three key areas –
- Ensuring adequate safeguarding of client assets.
- Addressing risks associated with conflicts of interest.
- strengthening cross-border cooperation.
Although the recommendations are focused on addressing risks to financial stability, they do not cover all specific risk categories that are associated with crypto-related activities. For example, Central Bank-issued Digital Currencies (CBDCs) are not subject to FSB’s recommendations.
FSB Secretary-General John Schindler told reporters that “crypto asset players” can no longer go about their business without complying with rules or arguing that there is a lack of regulatory clarity, as the financial body’s policy framework “makes clear the standards that should apply”.
The FSB has been working closely with international organizations and sectoral standard-setting bodies (SSBs) like the Basel Committee and the International Organization of Securities Commissions (IOSC) to produce a coordinated, mutually supportive, and complimentary cryptocurrency regulation.
The three bodies have developed a shared work plan under which they will coordinate on promoting the development of a “comprehensive” and “coherent” global regulatory framework that also includes provisions of more granular guidance by SSBs, monitoring, and public reporting.
In May, the IOSCO proposed the world’s first global approach to regulating crypto markets by day-to-day operations. The 18 standards proposed by the international securities watchdog are said to cover dealings with conflicts of interest, market manipulation, cross-border regulatory cooperation, custody of crypto assets, operational risks, and treatment of retail customers.
IOSCO chair Jean-Paul Servais said the plan represents a turning point in tackling risks associated with crypto assets such as Bitcoin (BTC) and Ether (ETH). The new regulations will apply safeguards from the traditional financial markets to the crypto asset sector, eliminating conflicts of interest between different areas of the crypto ecosystem.
The organization aims to finalize its standards by the end of the year and expects its 130 members worldwide, including the U.S. Securities and Exchange Commission (SEC), Japan’s Financial Service Agency (FSA), U.K’s Financial Conduct Authority (FCA), and Germany’s BaFin, to use them to patch up the gaps in their rulebooks.
The watchdog believes its crypto standards will put an end to crypto firms trying to play off regulators by pointing their fingers at inconsistent regulations.
FSB-member nations have agreed to commit to the proposed crypto regulations and will review how the policy recommendations are put into place by the end of 2025.