G20 watchdog – Global rules leave crypto firms with no place to hide

The G20’s Financial Stability Board (FSB) has published its final recommendations on supervising firms that trade cryptoassets such as bitcoin, saying that they need to introduce basic safeguards to prevent the blow-ups seen at FTX exchange and other crypto casualties.

The FSB, which coordinates financial regulation for the world’s 20 biggest economies, said that its recommendations aim to address the potential risks to financial stability posed by cryptoasset markets, especially as they become more interconnected with traditional finance.

The recommendations cover areas such as robust governance, proper risk management, disclosures and customer protection. The FSB said that these are universal guard rails that should apply to all cryptoasset service providers, regardless of where they are based or how they operate.

“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 in a statement1.

The FSB also revised its existing recommendations for stablecoins, which are digital tokens that aim to maintain a stable value by pegging themselves to a basket of assets or currencies. The watchdog said that it took into account the demise of TerraUSD/Luna coins, which collapsed in December 2022 after a cyberattack and a run on the reserves.

The FSB said that stablecoins should be subject to the same level of regulation and oversight as other payment systems and instruments, and that they should have adequate reserve management and redemption arrangements.

“Stablecoins should not be used as a means of circumventing existing regulatory frameworks or creating regulatory arbitrage opportunities,” the FSB said.

The FSB’s recommendations come after a turbulent year for cryptoasset markets, which saw several high-profile incidents of fraud, hacking, insolvency and volatility.

One of the most notable cases was the collapse of FTX, a Bahamas-based crypto exchange that offered leveraged trading and derivatives. FTX went bust in November 2022 after losing $850 million in customer funds due to a series of liquidations and margin calls triggered by a sharp drop in bitcoin prices.

The FTX debacle highlighted the vulnerabilities of crypto firms that operate outside the regulatory perimeter or in non-compliance with existing rules. The FSB said that all countries should apply its recommendations, even those that are not members of the watchdog.

“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.”

The FSB’s recommendations are not legally binding, but they reflect the consensus of its members, which include central banks, finance ministries and regulators from major economies. The FSB said that it expects its members to implement its recommendations by the end of 2024 and that it will review their progress by the end of 2025.

The FSB also said that its recommendations are intended to complement and not replace the existing or planned initiatives by other global standard-setting bodies, such as the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).

The BCBS is working on a new prudential framework for banks’ exposures to cryptoassets, which could impose higher capital requirements and stricter supervision. The IOSCO has proposed a global approach to regulating crypto market day-to-day operations, such as trading platforms, custody services and disclosure standards.

The FSB’s recommendations come at a time when cryptoasset markets are recovering from last year’s rout, boosted by a landmark legal victory for Ripple Labs Inc on Thursday, which had challenged regulators over how far tokens should come under U.S. securities law.

Bitcoin, the largest and most popular cryptocurrency, has reached 13-month highs above $50,000, while other tokens such as ethereum and solana have also surged in value. The total market capitalization of all cryptoassets has surpassed $2 trillion.

However, the sector still faces significant challenges and uncertainties, such as regulatory scrutiny, cyberattacks, environmental concerns and competition from central bank digital currencies (CBDCs).

The FSB said that it will continue to monitor the developments and risks in cryptoasset markets and coordinate with other international bodies to ensure a consistent and effective response.

“The FSB remains vigilant to emerging risks from cryptoassets and will take further action if needed to address any material threats to global financial stability,” it said.

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