G20 Watchdog Report Highlights Crypto Firms’ Nowhere-to-Hide Situation Under Global Rules

Amid a heightened call for comprehensive digital assets legislation, the G20’s Financial Stability Board (FSB), on July 17, published its final recommendations for regulating crypto trading firms. It focuses on issues relating to regulatory supervisory and oversight of crypto assets to help foster innovation.

The regulator also revised its existing recommendations for stablecoins in light of the catastrophic collapse of TerraUSD/Luna stablecoins. 

The FSB noted that with globally agreed rules, crypto firms would have no choice but to introduce basic measures to avoid similar mayhems like the FTX collapse. 

FTX Collapse Highlights Crypto’s Intrinsic Volatility and Structural Vulnerabilities

According to the watchdog, the 2022 Terra and FTX collapse underscored inherent volatility and structural vulnerabilities of cryptocurrencies and related players. 

FSB also emphasized that last year’s events show that the failure of a critical crypto service provider can transmit ripple effects across the entire ecosystem. The FSB fears that crypto-engineered risks may spill over to the traditional finance ecosystem causing financial instability.

“As recent events have illustrated, if linkages to traditional finance were to grow further, spillovers from crypto assets markets into the broader financial system could increase,” said the FSB.

The watchdog’s recommendations borrow universal safeguards from traditional finance to govern crypto before the sector expands large enough to pose financial instability-related threats.

 The recommendations focus on three key areas: securing customers’ assets, addressing risks related to conflicts of interest, and enforcing cross-border cooperation. 

Its implementation would be jurisdiction-wise since every jurisdiction has a peculiar experience enforcing digital assets regulations.

The board will focus on the jurisdictions’ experiences and build on the principles of ‘same activity, same risk, same regulations’ to ensure a high-level, flexible, and technology-neutral implementation.

Financial Stability Board Tightens Oversight on Crypto Firms to Prevent Risks to Financial Stability

The FSB wants to tighten oversight on crypto firms to avoid conflicts of interest and institute measures to manage risks and liabilities. 

Also, the regulatory framework requires crypto firms to provide appropriate disclosures to ensure customer funds stay separate from company money.

The G20’s FSB wants all countries, including non-member states, to implement its recommendations. It bears mentioning that FTX was a Bahamas-based company, and the Bahamas was not a member of the Financial Stability Board. 

The watchdog believes observing the recommended measures would avoid potential threats to financial stability, losses, and risks associated with cryptocurrencies. 

As quoted by Reuters, FSB secretary John Schindler said crypto assets players should operate within the regulatory perimeter and stop violating existing rules.

“These players can no longer argue there is a lack of regulatory clarity, as our framework makes clear the standards that should apply,” Schindler added. 

While the FSB’s recommendations mark a milestone in addressing the risks plaguing the crypto market, it has drawbacks. 

It mainly addresses the potential risks of financial instability associated with cryptocurrencies. It does not cover all specific risk categories related to cryptocurrency activities.

The FSB expects additional measures from the BIS’s Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO), and other agencies to address the deficiencies.