Author | Colin Wu
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 continue to enhance regulatory efforts for crypto assets. Following a series of risk events in 2022, the crypto asset market saw a clear rebound in price and trading volume in 2023, with the global market value of crypto assets reaching $1.55 trillion at the end of the year, a year-on-year increase of 10.71%. Given the potential spillover risks of crypto assets to the stability of the financial system, regulatory authorities worldwide are increasingly intensifying their regulatory efforts on crypto assets, with 51 countries and regions having already issued prohibitive regulations on crypto assets, and some economies have adjusted existing laws or re-legislated regulations.
The United States regulates behaviors of crypto asset issuers violating the (Securities Act) based on existing regulatory laws. 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 imply SEC approval or endorsement of Bitcoin products, and investors should remain cautious regarding the risks associated with Bitcoin and products linked to the value of crypto assets.
The EU has approved the (Crypto Asset Market Regulation), 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 pace of virtual asset legislation, issuing the (Financial Services and Markets Bill), incorporating crypto assets into the bill's regulatory scope;
Singapore has released a (stablecoin regulatory framework), clarifying the scope of regulated stablecoins and the conditions for issuers;
Japan has enacted the (Fund Settlement Act), limiting the issuers of stablecoins to licensed banks, registered transfer agents, and trust companies.
Hong Kong is actively exploring licensing management for crypto assets. Hong Kong categorizes virtual assets into two types for regulation: securitized financial assets and non-securitized financial assets, implementing a distinctive 'dual license' system for virtual asset trading platform operators, where 'security tokens' are subject to regulation and licensing under the (Securities and Futures Ordinance), while 'non-security tokens' are subject to regulation and licensing under the (Anti-Money Laundering Ordinance). Institutions engaged in virtual asset businesses must apply for a registration license from the relevant regulatory authorities to operate. At the same time, it requires large financial institutions such as HSBC and Standard Chartered Bank to include cryptocurrency exchanges in their daily customer monitoring scope.
Page 67 macro-prudential 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 infrastructures is limited, but as the application scenarios of crypto assets increase in payments and retail investments, crypto assets may pose risks in certain economies.
The FSB and relevant standard-setting bodies jointly developed a global regulatory framework for crypto assets, guided by the principle of 'same activity, same risk, same regulation' to help regulators address financial stability risks associated with crypto assets.
The IMF and FSB have developed a regulatory policy roadmap to identify and address macroeconomic and financial stability risks posed by 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, and fill the data gaps required by the rapidly changing crypto asset ecosystem.
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The Financial Stability Board issues an 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,' aiming to enhance global consistency in regulatory approaches to the crypto asset industry, reduce regulatory gaps, prevent regulatory arbitrage, and effectively mitigate financial risks.
I. Overall principles of the two regulatory recommendations
Firstly, the principle of 'same business, same risk, same regulation.' If crypto assets or '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.
Secondly, the principle of flexibility. Regulatory authorities in each economy can apply existing laws and regulations to the crypto asset industry or formulate new laws and regulations to implement relevant regulatory recommendations.
Thirdly, 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 technology.
II. Content of Regulatory Recommendations
Two regulatory recommendations specify requirements for regulatory authorities, crypto asset issuers, and service providers.
(I) (High-level recommendations on the monitoring, supervision, and regulation of crypto asset businesses 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 regulate crypto assets and effectively enforce relevant laws and regulations.
2. Comprehensive Regulation. Regulatory authorities should implement comprehensive regulations commensurate with the risks of crypto assets according to the principle of 'same business, same risk, same regulation.' For example, formulating regulatory policies that match the risks, scale, complexity, and systemic importance; assessing whether existing regulatory measures can address the financial stability risks posed by crypto assets and adjusting the regulatory scope as necessary; standardizing the regulatory standards for crypto asset markets and traditional financial markets to adequately protect the interests of all stakeholders.
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 domestic and international communication, information sharing, and consultation, and drive consistency in regulation.
4. Governance Framework. Issuers of crypto assets and service providers should develop and disclose a comprehensive governance framework that matches their risks, scale, complexity, and systemic importance, as well as the financial stability risks they may pose, with a clear accountability mechanism and procedures for identifying, addressing, and managing conflicts of interest.
5. Risk Management. Issuers of crypto assets and service providers should establish an effective risk management framework: capable of identifying, measuring, assessing, monitoring, reporting, and managing all significant risks; having a reputable management team that can effectively supervise compliance issues; establishing emergency plans and business continuity plans (BCP), complying with the anti-money laundering requirements of the Financial Action Task Force (FATF), protecting customer assets, and reducing the risk of customer asset impairment, abuse, or inability to redeem on time.
6. Data Management. Issuers of crypto assets and service providers should establish a comprehensive data management system: ensuring data integrity and security, complying with data security laws and regulations; promptly correcting erroneous data to ensure data quality; 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. Issuers of crypto assets and service providers should ensure adequate information disclosure. The disclosed information should include necessary information regarding operations, transactions, management, and product risk characteristics; terms of custodial relationships, measures for protecting customer assets, and risks of custodian bankruptcy; significant technological risks such as cybersecurity risks and climate 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 multi-functional crypto asset service providers. Regulatory authorities should require service providers to build an organizational management system that aligns with their overall strategy and risk profile; when service providers fail to comply with existing regulations or encounter severe conflicts of interest, strong measures should be taken in accordance with the law; closely prevent concentration risks and related party transaction risks, and establish additional prudential regulatory requirements as necessary; require cross-border service providers to share information to prevent the spread of risks overseas.
(II) (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 the 7 areas of requirements similar to CA recommendations, three separate recommendations are also proposed.
1. Recovery and resolution plans. 'Global stablecoins' 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 continued.
2. Redemption rights, stability, and prudential requirements. Strong legal claims or guarantees should be provided to users concerning the issuers of 'global stablecoins' or the underlying reserve assets, ensuring timely redemptions: explaining the redemption process, redemption fees, and claims situations to users, including how to ensure a smooth redemption in stressed scenarios; reserves should equal the amount of stablecoins in circulation and consist of high-quality, highly liquid assets that are unencumbered and easy to liquidate. Ownership of reserve assets should be protected in the event of issuer bankruptcy; compliance with prudential requirements (including capital and liquidity requirements), with sufficient liquidity to respond to 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) and build the necessary products and systems to adapt to new regulatory requirements.
III. Progress and Future Outlook
Follow up on the implementation of member policies. Track key market and regulatory developments since the release of regulatory recommendations, summarizing the progress, experiences, and challenges faced by FSB members in implementing high-level regulatory recommendations for crypto assets and 'global stablecoins.'
Assessing the effectiveness of regulatory recommendation implementation. By the end of 2025, cooperate with relevant international organizations to assess member economies' implementation of regulatory recommendations to ensure comprehensive and consistent implementation of regulatory recommendations and to determine whether there is a need to update these recommendations.
Ongoing research to improve regulatory policies. Research the potential financial risks posed by multi-functional crypto asset service providers and assess whether additional regulatory policies are needed based on potential impacts.
Expanding the scope of implementation and monitoring. Taking measures in collaboration with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations in non-FSB members, reducing the risk of regulatory arbitrage. Inviting non-FSB member economies with significant cross-border crypto asset businesses to join relevant FSB working groups to expand the cross-border monitoring scope of crypto assets.
Original link:
http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/5547040/index.html