Written by: Colin Wu
Recently, the People's Bank of China released the (China Financial Stability Report (2024)), which mentions global cryptocurrency regulatory dynamics in several sections and particularly highlights Hong Kong's compliance progress in cryptocurrency.
Page 47 (Non-bank institutions and other parts)
Regulatory authorities in various countries continue to enhance their regulatory efforts on crypto assets. After experiencing a series of risk events in 2022, the crypto asset market saw a significant rebound in prices and trading volumes in 2023, with the global market value 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 the stability of the financial system, regulatory authorities in various countries are continuously increasing their regulatory efforts. Currently, 51 countries and regions globally have enacted prohibitive regulations on crypto assets, and some economies have adjusted existing laws or re-legislated to regulate them.
The United States supervises the actions 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 mean the SEC approves or endorses Bitcoin products, and investors should remain cautious regarding the risks associated with Bitcoin and products linked to crypto assets.
The EU has approved the (Regulation on Markets in Crypto-assets), establishing the world's first comprehensive and clear regulatory framework for virtual assets, which is scheduled to be officially implemented by the end of 2024.
The UK is accelerating the legislative pace for virtual assets by enacting the (Financial Services and Markets Act), bringing crypto assets under the regulatory scope of the act.
Singapore has released the (Stablecoin Regulatory Framework), clarifying the scope of regulated stablecoins and the conditions for issuers.
Japan has enacted the (Funds Settlement Act), limiting the issuers of stablecoins to licensed banks, registered transfer agencies, and trust companies.
Hong Kong 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, implementing a distinctive 'dual licensing' system for virtual asset trading platform operators. 'Securitized tokens' are subject to the regulation and licensing system under the Securities and Futures Ordinance, while 'non-securitized tokens' are subject to regulation and licensing under the Anti-Money Laundering Ordinance. Institutions engaged in virtual asset business must apply for registration licenses from the relevant regulatory authorities before they can operate. At the same time, large financial institutions such as HSBC and Standard Chartered Bank are required to include crypto asset exchanges in their regular client monitoring.
Page 67, macro-prudential management section
In recent years, crypto asset activities have become increasingly complex, with significant market volatility. Overall, the linkage between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure is limited. However, as the application scenarios of crypto assets increase in payments and retail investments, they may trigger risks in certain economies.
The FSB and relevant standard-setting organizations have jointly developed a global regulatory framework for crypto assets, guided by the principle of 'same activity, same risk, same regulation' to help regulatory authorities address 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 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 data gaps needed for 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 the global consistency of regulatory approaches in the crypto asset industry, reducing regulatory loopholes, preventing regulatory arbitrage, and effectively mitigating financial risks.
1. General principles of the two regulatory recommendations.
Firstly, 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.
Secondly, the principle of flexibility. Regulatory authorities in each economy may 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.
2. Content of regulatory recommendations
The two regulatory recommendations put forward specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(1) (High-level recommendations on monitoring, supervision, and regulation of crypto asset businesses and markets) (CA recommendations)
The CA recommendations collectively include 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 regulation commensurate with the risks of crypto assets according to the principle of 'same business, same risk, same regulation.' This includes formulating regulatory policies matching their risks, scale, complexity, and systemic importance; assessing whether existing regulatory measures can address the financial stability risks posed by crypto assets, and expanding or adjusting the regulatory scope as appropriate; unifying regulatory standards for the crypto asset market and traditional financial markets to fully 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 communication, information sharing, and consultations domestically and internationally, and enhance regulatory consistency.
4. Governance framework. Issuers and service providers of crypto assets should develop and disclose a comprehensive governance framework that aligns with their risks, scale, complexity, systemic importance, and the financial stability risks they may pose, including clear accountability mechanisms and procedures for identifying, addressing, and managing conflicts of interest.
5. Risk management. Issuers and service providers of crypto assets should establish an effective risk management framework capable of identifying, measuring, assessing, monitoring, reporting, and managing all significant risks; have a reputable management team able to effectively supervise compliance issues; establish emergency response plans and business continuity plans (BCP), comply with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protect customer assets, and reduce the risks of customer assets being impaired, misused, or unable to be redeemed on time.
6. Data management. Issuers and service providers of crypto assets should establish a comprehensive data management system: 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 comprehensively, timely, accurately, and continuously report relevant data information; supporting cross-economy data sharing to improve public understanding of crypto assets.
7. Information disclosure. Issuers and service providers of crypto assets should ensure adequate information disclosure. The disclosed information should include necessary information such as operational, transactional, management, and product risk characteristics; terms of custody relationships, measures for asset protection of clients, and risks of custodian bankruptcy; significant technological risks such as cybersecurity risks and environmental climate risks.
8. Addressing the financial stability risks arising from the linkage 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 to identify and mitigate 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 strategy and risk status; when service providers fail to comply with existing regulations or create significant conflicts of interest, strong measures should be taken in accordance with the law; closely prevent concentration risk and related transaction risk, and additional prudential regulatory requirements should be established if necessary; require cross-border service providers to share information to prevent the spread of risks abroad.
(2) (High-level recommendations on the regulation of 'global stablecoins') (GSC recommendations)
The GSC recommendations collectively include 10 high-level recommendations, in addition to 7 aspects similar to the CA recommendations such as regulatory power, governance framework, risk management, etc., three additional recommendations are also proposed separately.
1. Recovery and resolution plans. 'Global stablecoins' should develop appropriate recovery and resolution plans to support orderly liquidation or resolution under the legal framework, ensuring that critical functions and activities can be restored or maintained.
2. Redemption rights, stability, and prudential requirements. Strong legal claims or guarantees should be provided to users regarding the issuers or underlying reserve assets of 'global stablecoins,' ensuring timely redemption: inform users of the redemption procedures, redemption fees, and claims status, including how to ensure smooth redemption under stressed scenarios; maintain reserve assets equal to the amount of stablecoins in circulation, with reserve assets consisting of high-quality, highly liquid assets that are unencumbered and easy to liquidate. In the event of the issuer's bankruptcy, the ownership of reserve assets should be protected; comply with prudential requirements (including capital and liquidity requirements) and have sufficient liquidity to respond to capital outflows.
3. Pre-operational regulatory requirements. 'Global stablecoins' should comply with the market access requirements of the respective economy (such as licenses or registrations) before operation and build products and systems necessary to adapt to new regulatory requirements.
3. Work Progress and Future Outlook
Follow up on member policy implementation. Track major market and regulatory dynamics since the release of regulatory recommendations, summarize the implementation progress, experiences, and challenges faced by FSB members regarding crypto assets and 'global stablecoins' high-level regulatory recommendations.
Evaluate the effectiveness of implementing regulatory recommendations. By the end of 2025, collaborate with relevant international organizations to assess member economies' compliance with regulatory recommendations, ensuring comprehensive and consistent implementation of the recommendations, and determine whether there is a need 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 potential impacts.
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 business to join relevant FSB working groups to expand the cross-border monitoring of crypto assets.