FSB Issues Proposed International Regulatory Framework for Crypto Assets

Practical Law Legal Update w-037-2448 (Approx. 7 pages)

FSB Issues Proposed International Regulatory Framework for Crypto Assets

by Practical Law Finance

Report on International Regulation of Crypto-Asset Activities

The FSB crypto-asset report proposes that:

Regulatory powers and tools. Authorities should have the appropriate powers and tools, as well as adequate resources, to regulate, supervise, and oversee crypto-asset activities and markets, including crypto-asset issuers and service providers.
General regulatory framework. Authorities should apply effective regulation, supervision, and oversight to crypto-asset activities and markets, including crypto-asset issuers and service providers, proportionate to the financial stability risk they pose, or potentially pose.
Cross-border cooperation, coordination, and information sharing. Authorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication, information sharing, and consultation to support each other as appropriate in fulfilling their respective mandates and to encourage consistency of regulatory and supervisory outcomes.
Governance. Authorities, as appropriate, should require that crypto-asset issuers and service providers have in place, and disclose, a comprehensive governance framework.
Risk management. Authorities, as appropriate, should require crypto-asset service providers to have in place an effective risk-management framework that comprehensively addresses all material risks associated with their activities.
Data collection, recording and reporting. Authorities, as appropriate, should require that crypto-asset issuers and service providers have in place robust frameworks for collecting, storing, safeguarding, and timely and accurately reporting data, including necessary and relevant policies, procedures, and infrastructures. Authorities should have access to the data as necessary and appropriate to fulfil their regulatory, supervisory and oversight mandates.
Disclosures. Authorities should require that crypto-asset issuers and service providers disclose to users and relevant stakeholders comprehensive, clear, and transparent information regarding their operations, risk profiles and financial conditions, as well as the products they provide and activities they conduct.
Addressing financial stability risks arising from interconnections and interdependencies. Authorities should identify and monitor the relevant interconnections, both within the crypto-asset ecosystem, as well as between the crypto-asset ecosystem and the broader financial system. Authorities should address financial stability risks that arise from these interconnections and interdependencies.
Comprehensive regulation of crypto-asset service providers with multiple functions. Authorities should ensure that crypto-asset service providers that combine multiple functions and activities, for example crypto-asset trading platforms, are subject to regulation, supervision, and oversight that comprehensively address the risks associated with the individual functions, as well as risks arising from the combination of functions, including requirements to separate certain functions and activities as appropriate.

The FSB recommendations in the FSB crypto-asset report are designed to apply to any type of crypto-asset in any jurisdiction and should inform the regulation of any type of crypto-asset activity that poses, or potentially poses, risks to financial stability, both individually and collectively. The FSB notes that these recommendations should be applied to crypto-asset issuers and service providers in a way that is proportionate to their risk, size, complexity, and systemic importance.

The FSB will finalize the recommendations by mid-2023 and intends to review the implementation of the recommendations by the end of 2025.

Report on Global Stablecoin Arrangements

In 2022, the FSB, together with relevant international standard-setting bodies (SSBs) and international organizations, reviewed its ten high-level GSC recommendations, originally published in October 2020 (see Legal update, FSB Finalises High-Level Recommendations on Global Stablecoin Arrangements), including how any gaps identified could be addressed by existing frameworks, considering recent market and policy developments.

In the light of the review, the findings of which are set out in the GSC report, the FSB is consulting on revising its high-level recommendations for the regulation, supervision, and oversight of GSC arrangements to address associated financial stability risks more effectively.

The GSC report covers:

Recent market developments and the characteristics of existing stablecoins.
Recent policy developments, including regulatory initiatives, recent work of international standard-setting bodies.
Proposals to revise the high-level recommendations

Review of High-Level GSC Recommendations

The objective of the high-level recommendations is to promote consistent and effective regulation, supervision, and oversight of GSCs across jurisdictions to address the potential financial stability risks posed, both at the domestic and international levels, while supporting responsible innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.

The GSC report notes that although existing stablecoins are not widely used outside crypto-asset markets and have not to date posed a significant threat to global financial stability, their rapid growth, use across multiple jurisdictions, and potential to quickly scale in size may mean that they could pose a greater threat in the future if not subject to robust regulatory and supervisory policies. Authorities therefore need to be ready to regulate and supervise stablecoin arrangements before they evolve into GSC arrangements.

Accordingly, the FSB recommends in the GSC report extending the scope of the revised high-level recommendations to stablecoins with the potential to become GSCs. The introduction to the revised high-level recommendations also provides that authorities should, consistent with their respective mandates, choose to apply some high-level recommendations in a proportionate manner to stablecoin arrangements more widely, considering the size, complexity, and risk of those stablecoins.

The FSB aims to finalize the updated high-level recommendations by July 2023. It intends to undertake a review of implementation of the revised high-level recommendations by the end of 2025.

The FSB previously published a progress report on GSC arrangements in October 2021 (see Legal Update, FSB progress report on regulation, supervision and oversight of global stablecoin arrangements) a July 2022 FSB statement on crypto assets (see Legal update, Global Standard-Setting Bodies Issue Releases Addressing International Crypto-Asset Issues). The two sets of reports are closely interrelated, reflecting the interlinkages between stablecoins and the broader crypto-asset ecosystem. Although they have been developed as stand-alone documents, they are intended to work together and be consistent where they cover the same issues and risks. Comments on both publications can be made until December 15, 2022.

For more information on the proposed framework, see Legal Update, FSB proposes framework for regulation of cryptoasset activities.

FSB Issues Proposed International Regulatory Framework for Crypto Assets | Practical Law