What is the FSB report on crypto regulations? All you need to know

Understanding the FSB report on cryptocurrency regulation

The Financial Stability Board (FSB), an international financial regulator, presented a regulatory plan for cryptocurrencies to the Group of Twenty (G-20) nations, addressing concerns about crypto markets and activities. This proposal advocates for tighter oversight of crypto assets, particularly stablecoins, and a clear regulatory framework outlining risks and compliance requirements. The report, submitted in October 2022 by the FSB chairman, precedes discussions with key figures in Washington, D.C., and the upcoming 2022 G-20 summit. Additionally, it invites public feedback through a series of questions to refine the proposed regulations.

Contemporary challenges in regulating cryptocurrencies

The document, titled "Global Oversight of Crypto-asset Operations," initially highlights the existing challenges and hazards associated with regulating cryptocurrency activities, noting that "many activities and markets involving crypto-assets are non-compliant with relevant regulations or operate without regulation."

Furthermore, it elucidates the rationale behind advocating for stringent cryptocurrency regulation. Amid the ongoing crypto market downturn, investors have witnessed reductions in their holdings, and in certain instances, complete loss, attributed to the risky practices of certain cryptocurrency enterprises. The FSB underscores, "These vulnerabilities were exacerbated by a lack of transparency and disclosures, flawed governance, insufficient consumer and investor safeguards, and deficiencies in risk management."

Stablecoins are specifically targeted in the FSB document, with the report emphasizing that "they could potentially pose significant threats to financial stability." This stern stance on stablecoins aligns with the FSB's previous call for regulatory measures on stablecoins in July 2022. As stablecoins aim to replicate the valuation of real-world assets, such as the U.S. dollar, they are perceived as a challenge to existing central banks and national financial systems.

Suggested strategy for establishing a regulatory structure

The FSB presents an approach to formulate a regulatory framework for crypto assets, beginning with the principle of "same activity, same risk, same regulation." This entails applying existing regulations from the traditional financial sector to crypto assets and crypto firms offering financial services like lending, trading, and brokerage.

Two primary proposals are outlined in the report:

• Regulation and supervision: The FSB is developing a comprehensive set of proposed recommendations for "the regulation, supervision, and oversight of crypto-asset activities and markets." These recommendations are subject to further refinement but aim to assist G-20 nations in establishing clear international regulations governing all cryptocurrencies and intermediaries such as crypto exchanges.
• Enhancements to the Stablecoin Arrangement: The Stablecoin Arrangement, devised by the FSB, undergoes several updates in the latest proposal, including requirements for stablecoin issuers to furnish robust legal claims, ensure timely redemption at par into fiat currency, and maintain effective stabilization mechanisms, among other revisions. Essentially, the FSB advocates for centralizing stablecoin governance, assigning accountable parties for regulation, and ensuring prompt redemption for users seeking to exchange into fiat currency.

The FSB urges G-20 nations to prioritize crypto regulation and swiftly implement regulations akin to those governing traditional financial markets. Additionally, the board advocates for tailored regulations specific to cryptocurrencies, acknowledging their distinct uses and functionalities compared to traditional assets.

What does the Financial Stability Board (FSB) entail?

The Financial Stability Board (FSB) serves as a supervisory body for the worldwide financial system, providing regulatory advice to central banks and policymakers globally. Its objective is to promote stability in international financial markets. Although its mission encompasses all global economies, it frequently updates the G-20, consisting of the world's 20 largest economies, on its activities.

Does the Financial Stability Board (FSB) possess the authority to regulate cryptocurrencies?

No, the Financial Stability Board (FSB) lacks the authority to directly regulate cryptocurrencies. However, it is tasked with overseeing global financial markets and issuing official recommendations to the largest economies worldwide regarding financial regulations, which encompasses suggestions regarding the regulation of cryptocurrencies and crypto-related entities.

The FSB's regulation proposals are slated to be finalized by mid-2023, aiming to provide regulators and policymakers with clear directives on how to legally manage cryptocurrencies and firms offering crypto-related services. While the FSB primarily focuses on activities within the crypto market and stablecoins, it also continues to monitor the decentralized finance (DeFi) sector and associated companies.

Taking a firm stance on cryptocurrencies, particularly stablecoins, the FSB emphasizes the significant risks associated with such pegged assets. It singles out Terra (LUNA) as a notable example of a highly risky stablecoin that collapsed, wiping out billions in value virtually overnight. The FSB remains committed to providing guidance to global financial regulators as it finalizes these regulatory proposals in 2023.