Author: Colin Wu, Wu Says Blockchain
Recently, the People's Bank of China released the (China Financial Stability Report 2024), which extensively mentions global cryptocurrency regulatory dynamics and emphasizes compliance progress in Hong Kong.
Page 47 (non-bank institutions and other sections)
Regulatory authorities around the world continue to strengthen the 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, 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 of crypto assets on financial system stability, regulatory authorities in various countries are continuously increasing their regulatory efforts on crypto assets. Currently, 51 countries and regions have introduced prohibitory regulations on crypto assets, and some economies have adjusted existing laws or re-legislated regulations.
The United States regulates the behaviors of crypto asset issuers that violate existing regulatory laws (securities law). 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 a spot Bitcoin ETF in January 2024, the SEC chairman stated that this does not mean the SEC approves or endorses Bitcoin products, and investors should remain cautious about the risks related to Bitcoin and products linked to crypto asset values.
The EU has approved the (Crypto Asset Market Regulation Bill), establishing the world's first complete 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), bringing crypto assets under the scope of the bill's regulation.
Singapore has released a (stablecoin regulatory framework), clarifying the scope of regulated stablecoins and the conditions for issuers.
Japan has formulated the (Fund Settlement Act), which restricts 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 regulatory purposes: securitized financial assets and non-securitized financial assets, implementing a distinctive 'dual licensing' system for operators of virtual asset trading platforms, meaning '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 registration licenses from relevant regulatory authorities before operating. Meanwhile, large financial institutions such as HSBC and Standard Chartered are required to include crypto asset exchanges in their regular client monitoring.
Page 67 on macroprudential management
In recent years, crypto asset activities have become increasingly complex, and market volatility has been significant. Overall, the connections between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure are limited, but as applications of crypto assets increase in payments and retail investments, they may pose risks in some economies.
The FSB and relevant standard-setting bodies jointly developed a global regulatory framework for crypto assets, guiding regulatory authorities to respond to financial stability risks associated with crypto assets based on the principle of 'same activities, same risks, same regulations.'
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, and fill the data gaps required by the rapidly changing crypto asset ecosystem.
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The Financial Stability Board publishes an international regulatory framework for crypto assets.
In July 2023, the FSB published an international regulatory framework for crypto assets, proposing high-level regulatory recommendations for crypto assets and 'global stablecoins,' aiming to enhance the global consistency of regulatory approaches in the crypto asset industry, reduce regulatory gaps, prevent regulatory arbitrage, and effectively mitigate financial risks.
1. Overall Principles for Regulatory Recommendations
First, the principle of 'same business, same risk, same regulation.' If the economic functions of crypto assets and 'global stablecoin' businesses are the same as those of 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 can apply existing laws and regulations to the crypto asset industry, or develop new laws and regulations to implement related regulatory recommendations.
Third, the principle of technological neutrality. Regulatory authorities in various economies should regulate based on the economic functions and risk characteristics of crypto asset businesses rather than their underlying technology.
2. Content of Regulatory Recommendations
Two regulatory recommendations put forward specific 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 Power 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, develop regulatory policies that match their risks, scale, complexity, and systemic importance; assess whether existing regulatory measures can address financial stability risks posed by crypto assets and expand or adjust the regulatory scope as appropriate; unify regulatory standards for the crypto asset market 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 consultations domestically and internationally, and advance regulatory consistency.
4. Governance Framework. Crypto asset issuers and service providers should develop and disclose a comprehensive governance framework that matches their risks, scale, complexity, and systemic importance, 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 effective risk management frameworks capable of identifying, measuring, assessing, monitoring, reporting, and managing all significant risks; have a reputable management team that can effectively oversee compliance issues; establish emergency response 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 impaired, misused, or not redeemable on time.
6. Data Management. Crypto asset issuers and service providers should establish comprehensive data management systems: ensure data integrity and security, comply with data security laws and regulations; promptly correct erroneous data to ensure data quality is reliable; capable of comprehensively, timely, accurately, and continuously reporting relevant data information; support 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 details about operations, transactions, management, and risk characteristics of products; terms of custodial relationships, protection measures for customer assets, and risks of custodian bankruptcy; significant technological risks, such as cybersecurity risks and environmental risks.
8. Address 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 an organizational management system that aligns with their overall strategies and risk statuses; take strong measures as required by law when service providers fail to comply with existing regulations or cause serious conflicts of interest; closely monitor concentration risks and related party transaction risks, and establish additional prudential regulatory requirements when necessary; require cross-border service providers to share information to prevent the spread of risks abroad.
(II) High-level recommendations on the regulation of 'global stablecoins' (GSC Recommendations)
The GSC recommendations include a total of 10 high-level recommendations, which in addition to the 7 requirements similar to the CA recommendations regarding regulatory powers, governance frameworks, risk management, etc., also propose 3 separate recommendations.
1. Recovery and resolution plans. 'Global stablecoins' should develop appropriate recovery and resolution plans to support orderly liquidation or disposition under 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 issuer of 'global stablecoins' or the underlying reserve assets, ensuring timely redemptions: users should be informed about the redemption procedures, fees, and claims, including how to ensure smooth redemptions under stress scenarios; reserves must equal the amount of stablecoins in circulation and should consist of high-quality, highly liquid assets that are unencumbered, easily convertible, and not subject to depreciation. When the issuer goes bankrupt, the ownership of reserve assets should be protected; compliance with prudential requirements (including capital and liquidity requirements) should be ensured, with sufficient liquidity to respond to outflows.
3. Regulatory requirements before operation. 'Global stablecoins' should comply with the market access requirements of the economy they are in (such as licenses or registrations) before they begin operations and construct products and systems necessary to adapt to new regulatory requirements.
3. Work Progress and Future Outlook
Follow up on the implementation status of member policies. Track the main market and regulatory dynamics since the release of the regulatory recommendations, summarizing the implementation progress, experiences, practices, and challenges faced by FSB members in implementing 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 evaluate member economies' implementation of regulatory recommendations, ensuring comprehensive and consistent implementation of regulatory recommendations, and assess whether it is necessary to update the recommendations.
Continuously research and improve regulatory policies. Study the potential financial risks of multifunctional crypto asset service providers and assess whether additional regulatory policies are needed based on their potential impact.
Expand the scope of implementation and monitoring. Take measures in collaboration with relevant standard-setting organizations and other international bodies to promote the effective implementation of regulatory recommendations in non-FSB member countries, reducing the risk of regulatory arbitrage. Invite 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.