"Innovation precedes regulation" is a common mantra in the crypto space, highlighting the rapid growth and groundbreaking developments witnessed in the crypto-asset industry in recent years. However, the absence of a comprehensive regulatory framework has given rise to concerns regarding financial stability, consumer protection, and market integrity. To address these issues and establish global regulatory standards, the Financial Stability Board (FSB) has taken a significant step by finalising a comprehensive global regulatory framework for crypto asset activities.
With the objective of bringing consistency and comprehensiveness to the crypto-asset industry, this framework acknowledges and manages risks while simultaneously supporting responsible innovation and technological advancements. In essence, the time for regulations in the crypto space has arrived, ushering in a new era of oversight and accountability.
The Framework's Core Components
The finalised global regulatory framework proposed by the FSB encompasses two key components: recommendations for the regulation of crypto-asset activities and markets and revised recommendations specifically targeting "global stablecoin" arrangements. By integrating these components, the FSB aims to ensure a comprehensive approach to regulating the crypto-asset industry.
Consistency through "Same Activity, Same Risk, Same Regulation"
One of the guiding principles of the FSB's framework is "same activity, same risk, same regulation." This principle emphasises that when crypto-assets and intermediaries perform functions equivalent to those in the traditional financial sector, they should be subject to equivalent regulation. By applying consistent regulations across similar activities and risks, the framework promotes fairness and reduces regulatory arbitrage. It recognises that novel features and specific risks of crypto-assets should be taken into account while addressing potential financial stability risks arising from the interlinkages between the crypto-asset ecosystem and the traditional financial system.
Enhanced Regulatory Standards For Stablecoins
Stablecoins, which have the potential for wide use as a means of payment and store of value, pose significant risks to financial stability. The FSB's revised recommendations for "global stablecoin" arrangements strengthen requirements for users' redemption rights and establish a robust stabilisation mechanism. These enhancements mitigate potential risks associated with stablecoins and contribute to the overall stability of the financial system.
Comprehensive Oversight & Risk Management
The FSB's framework emphasises the need for appropriate regulatory powers and tools, effective risk management frameworks, and comprehensive oversight of crypto-asset activities and markets. Authorities are encouraged to establish a regulatory framework that encompasses governance, data collection and reporting, risk management, and disclosure requirements. This comprehensive approach enables regulators to monitor and address financial stability risks arising from interconnections and interdependencies within the crypto-asset ecosystem.
International Cooperation & Coordination
Recognising the global nature of the crypto-asset industry, the FSB emphasises the importance of cross-border cooperation, coordination, and information sharing among regulatory authorities. By facilitating international collaboration, the framework promotes a unified approach to addressing regulatory challenges and ensures that regulatory actions taken by one jurisdiction do not have unintended consequences in others. This cooperation helps maintain consistency and avoids regulatory fragmentation in the global crypto-asset industry.
Balancing Innovation & Risk Mitigation
The FSB's proposals align with the Goldilocks rule for regulation, which advocates for finding a balance between under-regulation and over-regulation. By promoting consistent and comprehensive regulation, the framework recognises the risks posed by crypto-assets and stablecoins, while also supporting responsible innovations brought about by technological advancements. While the FSB's framework aims to enhance regulatory standards and promote financial stability, it also acknowledges the importance of fostering responsible innovation. The recommendations strike a balance between supporting technological advancements and ensuring that risks associated with crypto-asset activities are appropriately addressed. By providing clear guidelines and flexibility for jurisdictions to implement domestic approaches, the framework enables regulators to adapt to evolving market dynamics while safeguarding the stability of the financial system.
With the finalisation of a comprehensive global regulatory framework for crypto asset activities, the Financial Stability Board has taken a significant step toward bringing consistency and comprehensiveness to the crypto-asset industry. The framework's core components, which include recommendations for the regulation of crypto-asset activities and markets, as well as revised recommendations for "global stablecoin" arrangements, address potential risks and strengthen oversight. By promoting consistent regulation, enhancing risk management, and fostering international cooperation, the framework supports responsible innovation while safeguarding financial stability in the evolving crypto-asset landscape.
(The author is the Vice President of crypto investment platform WazirX)
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