Author: Colin Wu, Wu Says Blockchain
Recently, the People's Bank of China released the (China Financial Stability Report 2024), which extensively discusses global cryptocurrency regulatory dynamics and emphasizes the compliance progress of cryptocurrencies in Hong Kong.
Page 47 (Non-bank institutions and other sections)
Regulatory authorities in various countries are continuously enhancing their regulation of crypto assets. After a series of risk events in the crypto asset market in 2022, prices and trading volumes rebounded significantly in 2023, and by the end of the year, the global market value of crypto assets reached $1.55 trillion, a year-on-year increase of 10.71%. In light of the potential spillover risks that crypto assets may pose to the stability of the financial system, regulatory authorities around the world are increasingly strengthening their oversight of crypto assets. Currently, 51 countries and regions have implemented prohibitory regulations on crypto assets, and some economies have adjusted existing laws or re-legislated regulations.
The United States regulates the behavior of crypto asset issuers violating (securities laws) based on existing regulations. The U.S. Securities and Exchange Commission (SEC) has rejected more than 20 applications for spot Bitcoin ETFs from 2018 to 2023. After approving the listing of spot Bitcoin ETFs in January 2024, the SEC chairman stated that this does not mean the SEC has approved or recognized Bitcoin products, and investors should remain cautious regarding the risks associated with Bitcoin and products linked to crypto assets;
The EU has approved the (Crypto Asset Market Regulation Bill), establishing the world's first comprehensive and clear regulatory framework for virtual assets, which is planned to be officially implemented by the end of 2024;
The UK has accelerated the pace of virtual asset legislation, enacting the (Financial Services and Markets Bill), which brings crypto assets under the bill's regulatory scope;
Singapore has released a (Stablecoin Regulatory Framework) that clarifies the scope of regulated stablecoins and the conditions for issuers;
Japan has enacted the (Fund Settlement Act), which limits issuers of stablecoins to licensed banks, registered money transfer agencies, and trust companies.
Hong Kong, China is actively exploring a licensing regime for crypto assets. Hong Kong classifies virtual assets into two categories for regulation: securitized financial assets and non-securitized financial assets. It implements a distinctive 'dual licensing' system for operators of virtual asset trading platforms, where 'security tokens' are subject to regulation and licensing under the (Securities and Futures Ordinance), and 'non-security tokens' are subject to regulation and licensing under the (Anti-Money Laundering Ordinance). Institutions engaged in virtual asset businesses must apply for registration licenses from the relevant regulatory authorities to operate. Meanwhile, large financial institutions, such as HSBC and Standard Chartered, are required to include crypto asset exchanges in their routine customer oversight.
Page 67 Macroprudential management section
In recent years, crypto asset activities have become increasingly complex, with significant market volatility. Overall, the association between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure is limited, but as the application scenarios for crypto assets increase in payments and retail investments, crypto assets may pose risks in certain economies.
The FSB and relevant standard-setting bodies jointly formulated a global regulatory framework for crypto assets, based on the principle of 'same activity, same risk, same regulation' to guide regulatory authorities in addressing financial stability risks related to crypto assets.
The IMF and FSB have developed a regulatory policy roadmap to identify and address macroeconomic and financial stability risks associated with crypto assets. The roadmap outlines work related to the implementation of the regulatory policy framework for crypto assets, aimed at promoting global information sharing and cooperation, filling data gaps arising from the rapidly changing crypto asset ecosystem.
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The Financial Stability Board has released an international regulatory framework for crypto assets.
In July 2023, the FSB released an international regulatory framework for crypto assets, proposing high-level regulatory recommendations for crypto assets and 'global stablecoins', aimed at enhancing the global consistency of regulatory approaches in the crypto asset industry, reducing regulatory gaps, preventing regulatory arbitrage, and effectively mitigating financial risks.
I. General principles of the two regulatory recommendations
First, the principle of 'same business, same risk, same regulation'. If crypto assets and 'global stablecoin' businesses have the same economic functions as traditional financial businesses and are accompanied by the same types of financial risks, they should comply with the same regulatory requirements.
Second, the principle of flexibility. Regulatory authorities in various economies may apply existing laws and regulations to the crypto asset industry, or they may formulate new laws and regulations to implement relevant regulatory recommendations.
Third, the principle of technological neutrality. Regulatory authorities in various economies should regulate according to the economic functions and risk characteristics of crypto asset businesses, rather than their underlying technology.
II. Content of regulatory recommendations
Two regulatory recommendations provide specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(I) (High-level recommendations on monitoring, supervision, and regulation of crypto asset businesses and markets) (CA Recommendations)
CA suggests a total of 9 high-level recommendations.
1. Regulatory powers and tools. Regulatory authorities should have appropriate regulatory powers, tools, and sufficient resources to oversee crypto assets, and effectively enforce relevant laws and regulations.
2. Comprehensive regulation. Regulatory authorities should implement comprehensive regulation commensurate with the risks of crypto assets, according to the principle of 'same business, same risk, same regulation.' For example, they should formulate regulatory policies that match their risks, scale, complexity, and systemic importance; assess whether existing regulatory measures can address the financial stability risks posed by crypto assets, and expand or adjust the regulatory scope as necessary; unify the regulatory standards for the crypto asset market and traditional financial markets to fully protect the interests of all relevant parties.
3. Cross-border cooperation, coordination, and information sharing. Given the cross-border nature of crypto assets, regulatory authorities should fully consider their spillover risks, promote effective communication, information sharing, and consultations domestically and internationally, and strive for regulatory consistency.
4. Governance framework. Crypto asset issuers and service providers should establish and disclose a comprehensive governance framework that matches their risk, scale, complexity, systemic importance, and the financial stability risks they may pose, with clear accountability mechanisms and procedures for identifying, handling, and managing conflicts of interest.
5. Risk management. Crypto asset issuers and service providers should establish an effective risk management framework: able to identify, measure, assess, monitor, report, and manage all significant risks; have a reputable management team capable of effectively overseeing compliance issues; establish emergency plans and business continuity plans (BCP), comply with anti-money laundering requirements related to the Financial Action Task Force (FATF), protect customer assets and reduce the risk of customer assets being damaged, abused, or unable to be redeemed on time.
6. Data management. Crypto asset issuers and service providers should establish a comprehensive data management system: ensure data integrity and security, comply with data security-related laws and regulations; timely correct erroneous data to ensure data quality; be capable of reporting relevant data information comprehensively, timely, accurately, and continuously; support cross-economy data sharing to enhance public understanding of crypto assets.
7. Information disclosure. Crypto asset issuers and service providers should ensure full information disclosure. The disclosed information includes necessary information such as operational, transactional, management, and product risk characteristics; terms of custodial relationships, customer asset protection measures, and risks of custodian bankruptcy; significant technological risks, such as cybersecurity risks and environmental risks.
8. Address financial stability risks arising from the connection between the crypto asset ecosystem and the financial system. Regulatory authorities should effectively monitor the internal connections within the crypto asset ecosystem and between the crypto asset ecosystem and other financial systems, identifying and mitigating potential financial stability risks.
9. Comprehensive regulation of multi-functional crypto asset service providers. Regulatory authorities should require service providers to build organizational management systems that align with their overall strategy and risk profile; when service providers fail to comply with existing regulations or create severe conflicts of interest, strong measures should be taken in accordance with the law; closely guard against concentration risks and related party transaction risks, and, if necessary, establish additional prudential regulatory requirements; require cross-border service providers to share information to prevent risks from spreading abroad.
(II) (High-level recommendations on the regulation of 'global stablecoins') (GSC Recommendations)
The GSC recommendations include a total of 10 high-level suggestions, in addition to 7 requirements similar to CA recommendations regarding regulatory powers, governance frameworks, risk management, etc., 3 separate suggestions are also put forward.
1. Recovery and resolution plans. 'Global stablecoins' should formulate appropriate recovery and resolution plans to support orderly liquidation or resolution within the legal framework, ensuring that key functions and activities can be restored or continue to operate.
2. Redemption rights, stability, and prudential requirements. Strong legal claims or protections should be provided to users for issuers of 'global stablecoins' or underlying reserve assets, ensuring timely redemption: users should be informed of the redemption process, fees, and claims situations, including how to ensure smooth redemption under stress scenarios; reserve assets equal to the amount of stablecoins in circulation should be maintained, consisting of high-quality, highly liquid assets that are unencumbered, easily convertible, and without depreciation. Ownership of reserve assets should be protected in the event of issuer bankruptcy; adherence to prudential requirements (including capital and liquidity requirements) should ensure sufficient liquidity to cope with capital outflows.
3. Regulatory requirements before operation. 'Global stablecoins' should meet the market access requirements of the economy in which they operate (such as licenses or registrations) before commencing operations and construct necessary products and systems to adapt to new regulatory requirements.
III. Progress and Future Outlook
Follow up on member policy implementation. Track major market and regulatory dynamics since the release of regulatory recommendations, summarizing the implementation progress, experiences, and challenges faced by FSB members regarding the high-level regulatory recommendations for crypto assets and 'global stablecoins'.
Evaluate the effectiveness of the implementation of regulatory recommendations. By the end of 2025, cooperate with relevant international organizations to assess member economies' compliance with regulatory recommendations, ensuring that the recommendations are comprehensively and consistently implemented, and determine whether there is a need to update the recommendations.
Continuously research and improve regulatory policies. Study the potential financial risks of multi-functional crypto asset service providers and assess whether additional regulatory policies need to be formulated based on potential impacts.
Expand the scope of implementation and monitoring. Take measures in cooperation with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations outside FSB members, reducing the risk of regulatory arbitrage. Invite non-FSB member economies with significant cross-border crypto asset businesses to join FSB-related working groups to expand the cross-border monitoring scope of crypto assets.