FSB sets final global crypto rules

Global policymakers are finalizing a regulatory framework in response to recent turmoil in the crypto space.

The Financial Stability Board (FSB) set out its final recommendations Monday for regulating the emerging crypto sector under the principle “same activity, same risk, same regulation.”

These final recommendations reflect both the results of a public consultation and the lessons of the past year in cryptoasset markets, the FSB said. Such lessons include the the failure of major stablecoins (Terra/Luna), the collapse of FTX amid allegations of fraud and misconduct, and the failure of several U.S. banks with connections to the crypto sector.

“These events demonstrate interlinkages between cryptoasset markets and the traditional financial system. Although spillovers to the traditional financial system have been limited, stress events in cryptoasset markets caused significant losses to investors and shook confidence in these markets,” the FSB stated in its recommendation report, adding that this highlighted the need for regulators to anticipate and guard against rising stability risks.

“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,” it said.

Among other things, the recommendations address the safeguarding of client assets, the risks stemming from conflicts of interest (particularly for vertically integrated crypto firms), and the lack of transparency in the sector.

“Cryptoasset service providers, including their affiliates, that combine multiple functions and activities must be subject to […] appropriate regulation, supervision and oversight, including, as appropriate, legal separation of certain functions,” the FSB said.

The recommendations also address information sharing and cross-border supervision.

The FSB said it will review the implementation of its recommendations by local regulators by the end of 2025.

In September, the FSB and the International Monetary Fund will deliver a joint report to the G20 on crypto regulation and supervision.

“This will support a coordinated and comprehensive policy approach to cryptoassets by considering macroeconomic and regulatory perspectives, including the full range of risks posed by cryptoassets,” the FSB said.

Additionally, international standards-setters will continue to work on enhancing effectiveness and consistency of regulation, supervision and oversight of crypto and stablecoin activities, the FSB noted.

Alongside the FSB initiative, the European Securities and Markets Authority (ESMA) published its first set of regulatory proposals seeking input on proposed rules for cryptoasset service providers — particularly related to registration, how they deal with conflicts of interests, and how they should handle complaints.

“We are determined to ensure entities involved in cryptoasset related activities understand that the EU is not a place for forum-shopping,” said Verena Ross, chair of ESMA, in a release. “We also want to remind consumers that, even with the implementation of [crypto regulation], there will be no such thing as a safe cryptoasset.”

The proposals are out for comment until Sept. 20. ESMA said it intends to publish a second consultation in October and that it aims to finalize its regulation by June 30, 2024.

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.