Dear Readers,
(we are going to dive into some “official stuff” so i, may, be a bit serious on this edition)
In this edition, we continue our exploration of the crypto-asset landscape, focusing on the pivotal role of regulation. Drawing insights from the Financial Stability Board's (FSB) recent report, Global Regulatory Framework for Crypto-Asset Activities we delve into why regulation is not just necessary, but instrumental in shaping the future of crypto-assets.
The Balancing Act of Regulation
Regulation in the crypto-asset market is a delicate balancing act. On one hand, it must protect investors and maintain financial stability. On the other, it must not stifle the innovation that makes this sector so dynamic. The FSB's report underscores the importance of comprehensive policy approaches that balance these considerations. For instance, while blockchain technology offers potential for financial inclusivity and efficiency, its misuse can pose risks to investors and the broader financial system. The FSB's recommendations aim to strike this balance.
Regulation as a Catalyst for Growth
Regulation is not just about risk management; it's also a catalyst for growth. A well-regulated market is a foreseeable one, which can attract more participants and foster confidence among investors. For instance, the introduction of regulatory frameworks in traditional financial markets has often led to increased market participation and growth. Similarly, the FSB's comprehensive regulatory framework for crypto-assets could pave the way for a new bull market in this sector.
For instance, the introduction of the Markets in Crypto-Assets (MiCA) regulation in Europe has had a significant impact. With the uncertainty eliminated by the regulation (MiCA), we see that VC investments coming into the crypto ecosystem from Europe have almost tripled compared to the previous quarter. This shows how clear and comprehensive regulation can boost investor confidence and stimulate investment in the crypto-asset market.
The Global Impact of Regulation
The FSB's report also highlights the importance of international consistency in regulation. In a global market like crypto-assets, regulatory discrepancies between countries can lead to regulatory arbitrage, where entities exploit these differences to evade stricter regulations. A coordinated, global approach to regulation can prevent this, ensuring fair play across different jurisdictions and fostering a healthier, more stable market.
The key takeaway? Crypto-asset activities aren't operating in a Wild West, regulation-free zone. Crypto-asset service providers can't just set up shop anywhere unless they meet all the regulatory requirements of that jurisdiction.
The final recommendations from the FSB build on the principles that informed the consultative framework, integrating key aspects based on the experiences of jurisdictional authorities implementing international standards. Here are the guiding principles:
"Same activity, same risk, same regulation" The FSB's recommendations aim to ensure that regulatory frameworks are applied to global stablecoin and crypto-asset activities in line with the risks they pose to financial stability. In other words, if a crypto-asset activity is performing a function equivalent to one in the traditional financial system, it should be subject to the same or equivalent regulation, no matter how it's conducted or marketed.
High-level and flexible The FSB's recommendations are high-level, providing enough wiggle room for jurisdictional authorities to implement them by applying current regulations or developing new domestic regulatory frameworks. This approach also allows for the development of granular standards that address sectoral issues within their respective mandates.
Technology neutral The FSB's recommendations focus on addressing financial stability risks associated with global stablecoin and crypto-asset activities, irrespective of the technology employed. Crypto-asset activities must be regulated based on their economic functions and the risks they pose, not the technological means used.
While the recommendations apply to any type of crypto-asset activity, including stablecoins, those stablecoins that could be widely used as a means of payment or store of value across multiple jurisdictions – global stablecoins (GSCs) – could pose particular risks to financial stability. Therefore, separate and complementary recommendations for crypto-asset activities that meet the definition of a GSC have been published to reflect their particular risks and heightened regulatory and supervisory requirements.
Recent Events and Their Implications for Crypto-Asset Regulation
Remember the downfall of the TerraUSD/LUNA coins and the de-pegging of several so-called stablecoins? These events highlighted the flaws in their stabilization mechanisms. Then, in November, the crypto-asset market was shaken again when FTX, one of the largest crypto-asset trading platforms at that time, went bankrupt.
In light of these lessons learned, the FSB has strengthened both sets of high-level recommendations in three areas:
Safeguarding of client assets: Financial service providers that hold or take control of assets from clients must ensure that these assets are effectively segregated from their own assets.
Conflicts of interest: Various crypto-asset intermediaries combine multiple functions. In some cases, they operate in ways that do not comply with existing requirements, which typically require that certain functions be conducted by different entities and subject to specific sectoral standards.
Cross-border cooperation: The borderless nature of crypto-assets underlines the importance of strong and consistent jurisdictional regulatory, supervisory and enforcement practices.
The Road Ahead for Countries
While the FSB's recommendations are universally applicable, each country, including Turkey, must tailor these guidelines to their unique context. Implementing robust regulatory measures in line with the FSB's recommendations can help countries like Turkey ensure financial stability while also fostering a conducive environment for crypto-asset growth.
So, what's next in the world of crypto-asset regulation? The FSB and the IMF are set to deliver a joint report to the G20 in September 2023. This report will synthesize the policy findings from the IMF's work on macroeconomic and monetary issues and the FSB's work on supervisory and regulatory issues. The goal is to support a coordinated and comprehensive policy approach to crypto-assets, considering both macroeconomic and regulatory perspectives.
The SSBs will continue to examine how existing standards apply to crypto-assets and stablecoin arrangements, and make revisions as needed. They'll also provide additional guidance that supplements existing standards and principles in light of the FSB recommendations.
It's important that FSB members implement these high-level recommendations and relevant international standards fully and consistently. Jurisdictional authorities may apply and enforce existing requirements and laws, as well as develop new or additional regulatory approaches.
The FSB will continue to facilitate discussions and information sharing amongst FSB members. They'll also regularly assess the need for further international policy work on crypto-asset activities. By the end of 2025, the FSB will conduct a review of the status of the implementation of these recommendations at the jurisdictional level.
The FSB, together with the IMF, the World Bank, and the SSBs, will engage with a wider set of jurisdictions to encourage implementation of the FSB recommendations and international standards. They'll also monitor and address cross-border issues related to stablecoins and other crypto-assets.
NK’s Take-aways
Let's take a moment to reflect on the regulatory landscape of the past few years. Ever since we got our hands on the initial drafts of the Markets in Crypto-Assets (MiCA) regulation back in 2019, it's been clear that the finalization of this comprehensive regulation would be a game-changer.
Think of it as a regulatory race, with the EU and the US vying for the lead in shaping the rules for new technologies. It's a bit like the competition between the US and China over "new products." But the EU has always had a more grounded approach to this race.
The EU's introduction of the first comprehensive regulation has been a rallying call for other countries. It's not a sprint, but a marathon, with the regulatory process being slow but well-thought-out. Now, the others are focusing on identifying the shortcomings in MiCA to refine and improve it.
Meanwhile, across the pond in the US, the EU's regulation has stirred up action. Court cases are being settled, and draft bills are being discussed in the Senate. It's like the EU has fired the starting gun, and the US is now off the blocks.
Looking ahead, the possibility of a policy conclusion emerging in FSB, WEF, and G20 in 2024 gives us hope. Previous policy reports were rather basic, but now we're moving towards more comprehensive and nuanced policy discussions.
This regulatory race is not just about who gets there first, but who can create a regulatory framework that balances innovation with investor protection and financial stability. It's about setting the stage for the next chapter in the story of crypto-assets.
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