FSB publishes final recommendations for regulating crypto assets

The Financial Stability Board (FSB) on Tuesday come out with a 9-point recommendation for regulating crypto assets. It has recommended that crypto-asset issuers and service providers should have a comprehensive governance framework with clear and direct lines of responsibility and accountability for all functions and activities.

FSB was asked by G20 to suggest a regulatory framework. Now, this report will be part of a synthesis paper to be taken up during G20 leadership summit under India’s presidency scheduled to take place in September.

The recommendations are contained in ‘FSB Global Regulatory Framework for Crypto-asset Activities’. This “framework is based on the principle of ‘same activity, same risk, same regulation’ and provides a strong basis for ensuring that crypto-asset activities and so-called stablecoins are subject to consistent and comprehensive regulation, commensurate to the risks they pose,” FSB said.This institution is an international body that monitors and makes recommendations about the global financial system.

General framework

Talking about general regulatory framework, one of the recommendations says authorities should apply comprehensive and effective regulation, supervision, and oversight to crypto-asset activities and markets – including crypto-asset issuers and service providers – on a functional basis and 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”.

Another recommendation is about governance. It has been suggested that appropriate authorities should require that crypto-asset issuers and service providers have in place and disclose a comprehensive governance framework with clear and direct lines of responsibility and accountability for all functions and activities they are conducting. “The governance framework should be proportionate to their risk, size, complexity, and systemic importance, and to the financial stability risk that may be posed by activity or market in which the crypto-asset issuers and service providers are participating,” the framework said.

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Risk management

Talking about risk management, the framework recommended that crypto-asset service providers have an effective risk management framework in place that comprehensively addresses all material risks associated with their activities.

One recommendation is about comprehensive regulation of crypto-asset service providers with multiple functions where the authorities have been suggested to ensurethat 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, including but not limited to requirements regarding conflicts of interest and separation of certain functions, activities, or incorporation, as appropriate.

Pointers

Global regulatory framework for crypto-asset activities

·       Final recommendations draw on the implementation experiences of jurisdictions and build on the principles – ‘same activity, same risk, same regulation’,

·       Strengthened recommendations areas such as ensuring adequate safeguarding of client assets, addressing risks associated with conflicts of interest, and strengthening cross-border cooperation.

·       Focus on addressing risks to financial stability and do not comprehensively cover all specific risk categories related to crypto-asset activities such as Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT); data privacy; cyber security etc

·       Central Bank Digital Currencies envisaged as digitalised central bank liabilities, not subject to these recommendations.

·       The global framework includes a shared workplan that the FSB and international standard-setting bodies developed for 2023 and beyond.