The FSB, which coordinates the creation of financial rules among the G20, says we need broader cryptocurrency regulation. Their statement proposes comprehensive international regulation on DeFi and stablecoin platforms.
Regulators propose first global rules before ‘crypto winter’ is resolved
Stablecoins may be forced to centralize distributed issuances and major crypto platforms under plans put forward by the Financial Stability Board (FSB) on Tuesday. The FSB, a watchdog and standard setter for the global financial system backed by central banks and ministries of finance, would like to see a comprehensive international rulebook targeting multiple conflicts of interest in the wake of the recent crypto market turmoil. This move comes after the May crash of TerraUSD or, more broadly, algorithmic stablecoins.
He cites the FSB’s concerns over liquidity mismatches, high leverage, and inappropriate business models in the highly connected crypto ecosystem.
Expand, innovate
A report released for consultation by the FSB on Tuesday urges jurisdictions around the world to expand existing financial norms and develop new ones for new crypto risks. Promising a more comprehensive policy assessment next year, it delays further exploration of new areas such as DeFi. But he warns that not disclosing method roles could prevent regulators from figuring out who is responsible in some so-called decentralized structures.
The report noted that some crypto companies have already violated the law by combining traditionally separate activities such as transaction, lending, custody and brokerage, and urged national authorities to step in and separate them if there are increased risks or conflicts of interest. According to the text in the report:
Various cryptocurrency activities are often combined into a single entity, sometimes in violation of current regulations. Authorities should exercise their powers and use their tools appropriately and in accordance with judicial legal frameworks, including the separation and separation of certain functions.
The FSB warns of extra risks when wallet providers offer services for stablecoins, cryptocurrencies that seek to hedge their value against traditional assets like the US dollar. The report noted that disruptions to a wallet service could allow malicious transfers and potentially lead to a stampede from panicked customers, often with no clarity on what would happen if a provider went bankrupt.
It is seeking to tighten international stablecoin rules, although a separate report released for consultation on Tuesday says most market players are struggling to keep up with current norms going back to 2020. “Most current stablecoin regulations do not meet the FSB’s High-Level Recommendations,” the report said, citing board-wide shortcomings in areas such as governance, risk management, and regulatory disclosures.
Closing the stablecoin door
Under new FSB plans, stablecoins that can be used in multiple jurisdictions may be forced to centralize management and cannot use automated algorithms to preserve value, such as the “flawed” TerraUSD. According to the report:
Authorities should require that the issuance of the GSC [global stablecoin] be managed and operated by one or more identifiable and responsible entity or persons. A GSC should not rely on arbitrage activities and derive its value from algorithms to maintain a constant value at all times.
This aims to address major flaws in the terraUSD design, which claims that the value can be exchanged for a companion token, LUNA. This is critically due to liquid trading, which is unlikely in the event of a sudden collapse of confidence. The FSB has no enforcement power and will rely on peer pressure to avoid a scenario where crypto companies might pick and choose the jurisdiction that offers the lightest regulatory burden.
The FSB aims to complete the recommendations by the middle of next year.
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