The Financial Stability Board (FSB), an international organization responsible for monitoring the global financial system, has introduced a comprehensive global regulatory framework for cryptocurrencies. These guidelines, recommended to the G20 countries, are based on the principle of “same activity, same risk, same regulation.” On July 17, the FSB published a public note and two separate guideline documents.
The guidelines consist of two sets of recommendations. The first set covers high-level recommendations for regulating cryptocurrencies in general, while the second set focuses on “revised high-level recommendations” for regulating “global stablecoins.” The term “global stablecoin” refers to any stablecoin that may be used in more than one jurisdiction.
To ensure the integrity of the crypto platforms, the FSB emphasizes the need for segregation of clients’ digital assets from the platforms’ own funds. Additionally, clear separation of functions is required to prevent conflicts of interest. Regulators are urged to facilitate tight cross-border cooperation and oversight.
Privacy is also addressed in the guidelines, with the FSB acknowledging the importance of privacy while also emphasizing the need for regulators to access necessary data to fulfill their regulatory, supervisory, and oversight mandates. This includes decentralized finance (DeFi) protocols.
Regarding global stablecoins, the FSB highlights the requirement for stablecoin issuers to have identifiable and responsible legal entities or individuals forming a “governance body.” These issuers must hold reserve assets in a 1:1 minimal proportion, unless they are subject to adequate prudential requirements equivalent to those imposed on commercial banks.
One notable addition is the potential obligation for global stablecoin issuers to obtain permits to operate in each jurisdiction. The guidelines state that authorities should not allow the operation of a global stablecoin arrangement in their jurisdiction unless it meets all regulatory, supervisory, and oversight requirements, including obtaining affirmative approval.
The FSB plans to review the implementation of these recommendations worldwide by the end of 2025. In September 2023, in collaboration with the International Monetary Fund, it will present a joint report on existing policies and regulatory issues to the G20.
Earlier in July, the Association for Financial Markets in Europe cited the FSB’s stance and urged European Union lawmakers to incorporate decentralized finance (DeFi) into the first EU-wide crypto framework.
Revised High-Level Recommendations:
1. Authorities’ readiness to regulate and supervise global stablecoin arrangements: Authorities should possess the necessary powers, tools, and resources to effectively regulate, supervise, and oversee global stablecoin arrangements and associated activities, enforcing relevant laws and regulations.
2. Comprehensive oversight of global stablecoin activities and functions: Authorities should apply comprehensive and effective regulatory, supervisory, and oversight requirements to global stablecoin arrangements, based on their functions and proportional to their risks, consistent with international standards and their respective mandates.
3. Cross-border cooperation, coordination, and information sharing: Authorities should collaborate and coordinate domestically and internationally, fostering efficient communication, information sharing, and consultation to support each other in fulfilling their mandates. This cooperation ensures comprehensive regulation, supervision, and oversight of global stablecoin arrangements across borders and sectors, aiming for regulatory and supervisory consistency.
4. Governance structures and decentralized operations: Global stablecoin arrangements should have a comprehensive governance framework, disclosing clear lines of responsibility and accountability for all functions and activities within the arrangement.
5. Risk management: Global stablecoin arrangements should implement effective risk management frameworks that address all significant risks associated with their activities, including operational resilience, cyber security safeguards, anti-money laundering and counter-financing of terrorism measures, and “fit and proper” requirements if applicable, in accordance with applicable laws and regulations.
6. Data storage and access: Global stablecoin arrangements should establish robust frameworks for collecting, storing, safeguarding, and timely reporting of data. Authorities should have access to this data as necessary and appropriate to fulfill their regulatory, supervisory, and oversight mandates.
7. Recovery and resolution: Global stablecoin arrangements should develop appropriate recovery and resolution plans.
8. Disclosures: Global stablecoin issuers and participants should provide comprehensive and transparent information to users and relevant stakeholders, enabling them to understand the functioning of the arrangement. This includes disclosing the governance framework, management of conflicts of interest, redemption rights, stabilization mechanisms, operations, risk management frameworks, and financial condition.
9. Redemption rights, stabilization, and prudential requirements: Global stablecoin arrangements should offer robust legal claims to all users against the issuer and/or underlying reserve assets, ensuring timely redemption. For stablecoins tied to a single fiat currency, redemption should be at par into that currency. To maintain stability and mitigate the risks of runs, stablecoin arrangements should have effective stabilization mechanisms, clear redemption rights, and meet prudential requirements.
10. Compliance with regulatory, supervisory, and oversight requirements before commencing operations: Global stablecoin arrangements should comply with all applicable regulatory, supervisory, and oversight requirements before operating in a jurisdiction and adapt to new regulatory requirements as necessary.
