Article reprinted from: Wu Says Blockchain
Author | Colin Wu
Recently, the People's Bank of China released the (China Financial Stability Report 2024), which extensively mentions 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 continue to enhance the regulation of crypto assets. After a series of risk events in 2022 that shook the crypto asset market, prices and trading volumes significantly rebounded in 2023, with the global market capitalization of crypto assets reaching $1.55 trillion by the end of the year, a year-on-year increase of 10.71%. Given the potential spillover risks that crypto assets may pose to the stability of the financial system, regulatory authorities worldwide have been increasing their regulatory efforts regarding crypto assets. Currently, 51 countries and regions globally have implemented prohibitions on crypto assets, and some economies have adjusted existing laws or re-legislated regulations.
The United States regulates crypto asset issuers for violations of (securities laws) based on existing regulatory frameworks. The U.S. Securities and Exchange Commission (SEC) has rejected over 20 applications for spot Bitcoin ETFs from 2018 to 2023. After approving the listing of a Bitcoin spot ETF in January 2024, the SEC chair stated that this does not mean the SEC has approved or endorsed Bitcoin products, and investors should remain cautious regarding the risks associated with Bitcoin and products linked to the value of crypto assets.
The European Union 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 accelerates the legislative process for virtual assets, enacting the (Financial Services and Markets Bill), bringing crypto assets under the regulatory scope of the bill;
Singapore has released a (Stablecoin Regulatory Framework) that clarifies the scope and issuer conditions of regulated stablecoins;
Japan has established the (Fund Settlement Act), limiting stablecoin issuers to licensed banks, registered transfer agencies, and trust companies.
Hong Kong, China actively explores the licensing management of crypto assets. Hong Kong classifies virtual assets into two categories for regulation: securitized financial assets and non-securitized financial assets. A distinctive 'dual licensing' system is implemented for virtual asset trading platform operators, where 'security tokens' are subject to regulation under the (Securities and Futures Ordinance) and licensing system, while 'non-security tokens' are subject to regulation under the (Anti-Money Laundering Ordinance) and licensing system. Institutions engaged in virtual asset businesses must apply for registration licenses with the relevant regulatory authorities before operating. Meanwhile, large financial institutions like HSBC and Standard Chartered Bank are required to include cryptocurrency exchanges in their routine client supervision.
Page 67 macroprudential management section
In recent years, crypto asset activities have become increasingly complex, with significant market volatility. Overall, the correlation 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 payment and retail investment, crypto assets may pose risks in some economies.
The FSB and relevant standard-setting bodies jointly established a global regulatory framework for crypto assets, guiding regulatory authorities in addressing financial stability risks related to crypto assets based on the principles of 'same activity, same risk, same regulation.'
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, aiming to promote global information sharing and cooperation, filling data gaps required by the rapidly changing crypto asset ecosystem.
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The Financial Stability Board releases the international regulatory framework for crypto assets
In July 2023, the FSB released the international regulatory framework for crypto assets, proposing high-level regulatory recommendations for crypto assets and 'global stablecoins,' aimed at enhancing global consistency in the regulatory approach to the crypto asset industry, reducing regulatory gaps, preventing regulatory arbitrage, and effectively avoiding financial risks.
I. Overall principles of the two regulatory recommendations
First, the principle of 'same business, same risk, same regulation.' If crypto assets and 'global stablecoin' businesses exhibit the same economic functions as traditional financial businesses and entail the same types of financial risks, they should comply with the same regulatory requirements.
Second, the principle of flexibility. Regulatory authorities in each economy can apply existing laws and regulations to the crypto asset industry or develop new laws and regulations to implement relevant regulatory recommendations.
Third, the principle of technological neutrality. Regulatory authorities in each economy should regulate based on the economic functions and risk characteristics of crypto asset businesses rather than their underlying technologies.
II. Content of regulatory recommendations
Two regulatory recommendations provide specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(High-level recommendations for monitoring, supervision, and regulation of crypto asset business and markets) (CA recommendations)
The CA recommendations include 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 regulations that correspond to the risks associated with crypto assets based on the principle of 'same business, same risk, same regulation.' For instance, developing regulatory policies that match their risks, scale, complexity, and systemic importance; assessing whether existing regulatory measures can address financial stability risks posed by crypto assets, and expanding or adjusting regulatory scopes as appropriate; unifying the regulatory standards for crypto asset markets and traditional financial markets to fully protect the interests of all parties involved.
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 efficient communication, information sharing, and consultation both domestically and internationally, and advance regulatory consistency.
4. Governance framework. Crypto asset issuers and service providers should develop and disclose comprehensive governance frameworks that match their risks, scale, complexity, and systemic importance, along with the potential financial stability risks they may pose, including clear accountability mechanisms and procedures for identifying, addressing, and managing conflicts of interest.
5. Risk management. Crypto asset issuers and service providers should establish effective risk management frameworks: able to identify, measure, assess, monitor, report, and manage all significant risks; having a reputable management team capable of effectively supervising compliance issues; establishing emergency plans and business continuity plans (BCP), complying with Anti-Money Laundering Financial Action Task Force (FATF) anti-money laundering requirements, protecting customer assets, and reducing the risk of customer assets being impaired, misused, or unable to be redeemed on time.
6. Data management. Crypto asset issuers and service providers should establish comprehensive data management systems: ensuring the integrity and security of data, complying with relevant data security laws and regulations; promptly correcting erroneous data to ensure data quality is reliable; being able to report relevant data information comprehensively, timely, accurately, and continuously; supporting cross-economy data sharing to enhance public understanding of crypto assets.
7. Information disclosure. Crypto asset issuers and service providers should ensure adequate information disclosure. The disclosed information should include necessary information regarding operational, trading, management, and product risk characteristics; terms of custody relationships, client asset protection measures, and risks of custodian insolvency; major technology risks, such as cybersecurity risks and environmental risks.
8. Addressing financial stability risks arising from the connections between the crypto asset ecosystem and the financial system. Regulatory authorities should effectively monitor the interconnections 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 multifunctional crypto asset service providers. Regulatory authorities should require service providers to build organizational management systems that align with their overall strategies and risk profiles; when service providers fail to comply with existing regulations or generate significant conflicts of interest, strong measures should be taken in accordance with the law; closely monitor concentration and related party transaction risks, and establish additional prudential regulatory requirements when necessary; require cross-border service providers to share information to prevent risk contagion.
(High-level recommendations on the regulation of 'global stablecoins') (GSC recommendations)
The GSC recommendations include a total of 10 high-level recommendations. In addition to 7 areas of requirements similar to those in CA recommendations, such as regulatory powers, governance frameworks, and risk management, there are also 3 separate recommendations.
1. Recovery and resolution plans. A 'global stablecoin' should develop appropriate recovery and resolution plans to support orderly liquidation or disposal within a legal framework and ensure that critical functions and activities can be restored or continue to operate.
2. Redemption rights, stability, and prudential requirements. Strong legal claims or guarantees should be provided to users regarding the issuers of 'global stablecoins' or their underlying reserve assets, ensuring timely redemption: explaining the redemption process, redemption fees, and claims; including how to ensure smooth redemption in stress scenarios; having reserve assets equal to the amount of circulating stablecoins, comprising high-quality, highly liquid assets that are unencumbered, easily convertible, and not subject to depreciation. In the event of the issuer's insolvency, the ownership of reserve assets should be protected; adhering to prudential requirements (including capital and liquidity requirements) to maintain sufficient liquidity to respond to outflows.
3. Pre-operational regulatory requirements. A 'global stablecoin' should meet the market access requirements of the economy in which it operates (such as licensing or registration) before commencing operations and build products and systems necessary to adapt to new regulatory requirements.
Third, work progress and future outlook
Follow up on member policy implementation. Track key market and regulatory dynamics since the publication of regulatory recommendations, summarizing the implementation progress, experiences, and challenges faced by FSB members regarding crypto assets and 'global stablecoins' high-level regulatory recommendations.
Assess the effectiveness of regulatory recommendations. By the end of 2025, in cooperation with relevant international organizations, assess member economies' implementation of regulatory recommendations to ensure comprehensive and consistent implementation and determine whether it is necessary to update the recommendations.
Continue to study and improve regulatory policies. Research potential financial risks posed by multifunctional crypto asset service providers, assessing whether additional regulatory policies need to be developed 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 of FSB members, reducing the risk of regulatory arbitrage. Invite non-FSB member economies with significant cross-border crypto asset activities to join relevant FSB working groups to expand the scope of cross-border monitoring of crypto assets.