The Financial Stability Board ("FSB"), an international body, headquartered in Basel, Switzerland, monitors and suggests recommendations on the global financial system. On the request of the G20, the FSB issued two reports (dated July 17 2023) titled, "High-level Recommendations for the Regulation, Supervision and Oversight of (i) Crypto-Asset Activities and Markets; and (ii) Global Stablecoin Arrangements", which set out high level recommendations on regulatory, supervisory and oversight issues relating to crypto-assets and Global Stablecoin ("GSC") arrangements with the intent to help adopt safe innovation.
The third G20 meeting of Finance Ministers and Central Bank Governors (FMCBG) under the Indian Presidency which was held during 17th-18th July 2023 in Gujarat, jointly chaired by Union Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman, and Governor, Reserve Bank of India, Shri Shaktikanta Das has also welcomed1 the high-level recommendations of the FSB on crypto asset activities and global stablecoin arrangements..
With India's presidency of G20 this year, India has prioritised the need to consider macro financial implications of crypto assets along with financial stability concerns. It is also worth noting that India is an active member of the FSB and has three seats in its plenary represented by Secretary, Deputy Governor-RBI and Chairman-SEBI.
Objective and Applicability of Recommendations
The recommendations issued by the FSB establish a global regulatory base, target to promote a technology-neutral framework and provide a strong basis for ensuring that crypto-asset activities and stablecoins are subject to consistent and comprehensive regulation. In terms of the reports, the recommendations apply to any type of crypto-assets in any jurisdiction, including Decentralized Finance (DeFi) protocols, however, Central Bank Digital Currencies (CBDCs) are not subject to these recommendations.
The key recommendations that have been prescribed under the FSB Reports dated 17 July 2023 are as follows.
Recommendation 1 - Regulatory Powers and Tools: The reports recommend the relevant jurisdictional authorities to have and utilise appropriate powers and tools, and adequate resources to regulate, supervise, and oversee crypto-asset activities and markets and GSC arrangements, as appropriate.
Recommendation 2 - General Regulatory Framework: A comprehensive and effective regulation should be drafted applicable to crypto asset issuers, service providers and GSC's proportionate to the financial stability risk they pose, or potentially pose, and consistent with authorities' respective mandates in line with the principle "same activity, same risk, same regulation".
Recommendation 3 - 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, as well as encourage consistency of regulatory and supervisory outcomes.
Recommendation 4 – Governance: Authorities, as appropriate, should ensure that crypto-asset issuers and service providers have in place a robust governance framework with clear and direct lines of responsibility and accountability for all functions and activities they are conducting.
Recommendation 5 - Risk Management: To the extent necessary to achieve regulatory outcomes comparable to those in traditional finance, crypto-asset issuers and service providers should address the financial stability risk that may be posed by the activity or market in which they are participating. The GSC arrangement should also have robust capabilities to measure, monitor and control funding and liquidity risks, including liquidity stress testing.
Recommendation 6 - Data Collection, Recording and Reporting: Crypto-asset issuers , service providers and GSC arrangements should have in place robust frameworks, including systems and processes, for collecting, storing, safeguarding, and the timely and accurate reporting of data. Authorities should also have access to the data as necessary and appropriate to fulfil their regulatory, supervisory and oversight mandates.
Recommendation 7 – Disclosures: Crypto-asset issuers and service providers should disclose to users and relevant stakeholders comprehensive, clear and transparent information regarding their governance framework, operations, risk profiles and financial conditions, as well as the products they provide and activities they conduct.
Recommendation 8 – 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 wider financial system and address financial stability risks that arise from these interconnections and interdependencies.
Recommendation 9 – Comprehensive Regulation of Crypto-Asset Service Providers with Multiple Functions: To ensure that crypto-asset service providers and their affiliates that combine multiple functions and activities, where permissible, are subject to appropriate regulation, supervision and oversight that comprehensively address the risks associated with individual functions and the risks arising from the combination of functions.
Overall, the framework of the report provides general recommendations which should be implemented by jurisdictions and does not address specific risks related to crypto-asset activities, which includes, data privacy, cyber security, consumer and investor protection, market integrity, competition policy, taxation etc.
While the recommendations are intended to be flexible so that the same can be incorporated in a wide range of regulatory frameworks, the report dictates recommendations which are already established principles and have been adopted by several crypto asset service providers. There is a need for comprehensive regulatory frameworks which can spell out specific guidelines and mandatory compliances to be undertaken by crypto asset service providers to ensure holistic global regulations.
Also, one will have to wait and watch as to how the principle of "same activity, same risk, same regulation" is implemented, which essentially means imposing similar regulations upon entities engaged in similar business activities and having similar risks. In the crypto industry, activities which are equivalent to an economic function in the traditional financial system may be subject to the same or equivalent regulation irrespective of the way crypto-asset activities are conducted or the way these activities are marketed.
The recommendations by FSB also include learnings from events of the past year in crypto industry, such as, downfall of the Terra USD/Luna coins and the de-pegging of a number of so-called stablecoins, along with collapse of FTX, which operated globally as one of the largest crypto exchange platforms.
By end of 2024, depending on the outcome of the FSB's analysis of potential risks to financial stability from DeFi and crypto-asset service providers that combine multiple functions, the FSB will also consider the regulatory implications in these areas and assess whether additional policy work is required.
By end of 2025, FSB will, in consultation with relevant standard setting bodies and international organisations, conduct a review of the implementation of recommendations in FSB jurisdictions and assess the need to update the afore mentioned recommendations.
As next steps, to coordinate a systematic policy approach towards regulating crypto-assets, the FSB and the International Monetary Fund (IMF) will deliver a joint report to the G20 in September 2023, which will synthesise the policy findings on macroeconomic and monetary issues by the IMF and supervisory and regulatory issues by the FSB.
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