First global guidelines are proposed by regulators before the “crypto winter” thaws

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Last Updated on October 11, 2022 by Bitfinsider

Cryptoasset companies should set aside capital like banks when engaging in similar operations, regulators proposed on Tuesday (Oct 11) in their first global regulations, as a “crypto winter” knocked $2 trillion off the sector and left investors nursing losses.

The Financial Stability Board (FSB), which oversees the formulation of financial regulations among the Group of 20 Economies (G20), issued nine recommendations for implementation by its members.

Currently, the market is mainly unregulated in the majority of countries, with compliance limited to defending against money laundering and terrorism financing, despite regulators’ warnings that investors risk losing their entire investment.

Klaas Knot, president of the Dutch central bank and chairman of the FSB, stated that the “crypto winter,” or recent dramatic decline in cryptocurrency prices, has strengthened the board’s assessment of existing structural risks.

The FSB has stated that cryptocurrencies, with a total value of approximately $935 billion compared to $3 trillion at their high in November of last year, do not pose a threat to financial stability; however, laws are necessary to control a likely recovery.

In a letter to G20 finance ministers meeting in Washington this week, Knot stated, “Concerns regarding the risks they represent to financial stability are therefore likely to resurface sooner rather than later.”

FSB proposes establishing a framework for governance, managing risks and data at crypto companies, and planning for a seamless shutdown of troubled cryptoasset firms.

During the current market upheaval, some crypto-asset lenders failed due to their susceptibility to runs, thin capitalization, concentrated exposures to dangerous entities, and risky trading and commercial endeavors, the FSB said.

The ideas seek international consistency in regulating crypto-assets, especially as the European Union finalizes ground-breaking regulations for the sector beginning in 2024.

The FSB stated that the essential idea is that the same activity should be regulated in the same manner, regardless of whether it is conducted by a cryptoasset company, a bank, or a payments provider, and that crypto companies may need to split some tasks to ensure this.

The ideas have been made available for public comment until December 15, after which FSB members will be required to expedite their adoption.

The FSB also reviewed its recommendations on regulating stablecoins, a type of cryptocurrency typically backed by assets or fiat currencies such as the dollar.

The FSB stated that the May failure of the dollar-backed stablecoin Terra demonstrated the high risk of loss and potential fragility of stablecoins lacking a stabilization mechanism.

The watchdog stated that the majority of existing stablecoins do not comply with its recommendations, and it offered adjustments to the recommendations, such as increasing stablecoin governance and stabilization processes, and clarifying and strengthening redemption rights.

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