FSB seeks consistency in crypto regulation

With securities and banking regulators clamouring for more oversight in the crypto sector, the Financial Stability Board (FSB) is proposing a framework for international regulation.

Efforts to bring the more scrutiny to the fledgling crypto sector have accelerated this year after a crash in the value of many cryptoassets, which also helped reveal a series of “structural vulnerabilities in those markets,” the FSB said.

“It exposed inappropriate business models, significant liquidity and maturity mismatches, the extensive use of leverage, and a high degree of interconnectedness within the crypto-asset ecosystem,” the group said in the framework published Tuesday.

These vulnerabilities were amplified by “a lack of transparency and disclosures, flawed governance, inadequate consumer and investor protections, and weaknesses in risk management.”

In the wake of those events, the FSB’s proposals, which are out for comment until Dec. 15, are intended to promote consistency in the regulation of the crypto sector through international cooperation, coordination and information sharing. The group is aiming to finalize the framework by mid-2023.

At the same time, the FSB issued revised proposals for supervising global stablecoin arrangements.

“The two sets of recommendations are closely interrelated, reflecting the interlinkages between stablecoins and the broader crypto-asset ecosystem,” the FSB said. While two sets of recommendations were developed independently, they are intended to be consistent and coordinated.

The proposals are based on the principle of “same activity, same risk, same regulation,” which has become global regulators’ preferred approach to regulating the crypto sector alongside conventional financial markets.

“Where cryptoassets 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,” the FSB said.

While the regulators acknowledged that the rules for cryptoassets should account for their novel features and risks, they also said that high standards should apply to cryptoassets that could be used for payments, or stores of value (such as stablecoins), “as they could pose significant risks to financial stability.”

The FSB said the various standards setters that are also working to address risks in the crypto sector, including banking and securities regulators, will coordinate with each other and with the FSB.

A review of the progress toward implementing the FSB’s final recommendations will take place by the end of 2025, it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.