In the wake of a tumultuous year for the cryptocurrency industry, international regulators are advocating for stricter rules to protect investors and maintain market integrity. On July 17, The Financial Stability Board (FSB), an international body that monitors and makes suggestions about the global financial system, issued a report containing a set of recommendations aimed at ensuring comprehensive and consistent regulation of the cryptocurrency sector.
The FSB Global Regulatory Framework for Crypto-asset Activities explicitly referenced the collapse of FTX and the calamitous downfall of the TerraUSD stablecoin as events that “demonstrate interlinkages between crypto-asset markets and the traditional financial system,” saying such catastrophes underscore the comprehensive development of rules regarding crypto-asset activities.
Safeguarding assets, minimizing damage
The FSB, which comprises regulators from dozens of jurisdictions globally, including the United States, the European Union, the United Kingdom, and China, emphasized the need for safeguarding clients’ assets and avoiding conflicts of interest in the report.
“Some entities are not transparent about their governance structures and set up complex structures of affiliated entities that often finance each other,” the report read, “leading to acute conflicts of interest and increasing interconnectedness and the risk of contagion within crypto-asset markets.”
The past year, the report noted, has highlighted what the FSB views as the inherent volatility and structural vulnerabilities of cryptocurrencies and their associated entities. Alongside the major failure of FTX and that exchange’s mismanagement of customer funds, the FSB pointed to the recent arrest of Celsius co-founder and former CEO Alex Mashinsky on charges of misleading investors and manipulating token prices for personal gain as examples of this trend.
The FSB’s call for stricter regulations also comes in the wake of the collapse of several crypto-focused banks, the temporary de-pegging of Circle’s USDC stablecoin, and the abrupt downfall of the TerraUSD stablecoin in May 2022, which contributed to the onset of a new crypto winter.
“Although spillovers [of these events] to the traditional financial system have been limited,” the report continued, “stress events in crypto-asset markets caused significant losses to investors and shook confidence in these markets.”
Enhancing global regulatory efforts
While the report stresses the similarities between the world of crypto and the traditional finance sphere, part of the industry’s legal battle in the United States with bodies like the U.S. Securities and Exchange Commission (SEC) hinges on the debate of crypto’s legal distinctiveness. The question of whether or not existing securities laws can be applied to digital assets remains an unanswered and hotly debated one, and not only in the United States.
Further complicating the picture is the fact that approaches to cryptocurrency regulation vary widely across the globe. While the European Union recently introduced a new law specifically tailored for cryptocurrencies, known as the Markets in Crypto Assets (MiCA) regulation, the SEC is attempting to apply existing rules, originally designed for traditional financial instruments, to the crypto industry, a major point of contention in the industry.
The FSB, however, encouraged all crypto-asset players to start complying with its basic recommendations and standards as soon as possible. Its final suggestions were made after a months-long consultation process, during which traditional finance companies advocated for stronger crypto controls. However, major crypto exchanges like Binance and Coinbase have expressed concerns that stricter regulations could potentially stifle innovation in the sector.
In September, both the FSB and the International Monetary Fund will deliver a report to the G20, presenting the combined findings of the latter’s work on macroeconomic and monetary issues and FSB’s Global Regulatory Framework for Crypto-asset Activities.
Editor’s note: This article was written by an nft now staff member in collaboration with OpenAI’s GPT-4.