Author | Colin Wu
Recently, the People's Bank of China released the (China Financial Stability Report 2024), which discusses global cryptocurrency regulatory dynamics and emphasizes compliance progress in Hong Kong.
Page 47 (Non-bank Institutions and Other Parts)
Regulatory authorities in various countries continue to enhance their regulatory efforts on crypto assets. After a series of risk events in 2022 that shook the crypto asset market, both 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 that crypto assets may pose to financial system stability, regulatory authorities are continuously increasing their regulatory efforts. Currently, 51 countries and regions around the world have issued prohibitive regulations on crypto assets, and some economies have adjusted existing laws or re-legislated to regulate them.
The United States regulates issuers of crypto assets for violations of (Securities Law) based on existing regulatory regulations. The U.S. Securities and Exchange Commission (SEC) has denied over 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 that the SEC has approved or endorsed Bitcoin products, and investors should remain cautious regarding 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 implemented by the end of 2024.
The UK is accelerating the pace of virtual asset legislation, enacting the (Financial Services and Markets Bill), which brings crypto assets into the scope of the bill's regulation.
Singapore has released a (stablecoin regulatory framework), clarifying the scope of regulated stablecoins and conditions for issuers.
Japan has enacted the (Funds Settlement Law), restricting issuers of stablecoins to licensed banks, registered transfer agencies, and trust companies.
Hong Kong, China is actively exploring the licensing management of crypto assets. It categorizes virtual assets into two types for regulation: securitized financial assets and non-securitized financial assets. It implements a distinctive 'dual-license' system for virtual asset trading platform operators, where 'security tokens' are subject to the (Securities and Futures Ordinance) regulations and licensing system, while 'non-security tokens' are subject to the (Anti-Money Laundering Ordinance) regulations and licensing system. Institutions engaged in virtual asset businesses must apply for a registration license from the relevant regulatory authorities to operate. Additionally, large financial institutions such as HSBC and Standard Chartered are required to include cryptocurrency exchanges in their daily customer supervision scope.
Page 67 Macro-prudential Management Section
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. However, as applications of crypto assets increase in payment and retail investment scenarios, they may pose risks in some economies.
The FSB and relevant standard-setting bodies 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 related to crypto assets. The roadmap outlines work related to the implementation of the regulatory policy framework for crypto assets and aims to promote global information sharing and cooperation, filling data gaps needed due to 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 suggestions for crypto assets and 'global stablecoins', aiming to enhance the global consistency of regulatory approaches in the crypto asset industry, reduce regulatory loopholes, prevent regulatory arbitrage, and effectively mitigate financial risks.
One, the overall principles of the two regulatory suggestions.
One is the principle of 'same business, same risk, same regulation'. If crypto assets and 'global stablecoin' businesses have the same economic function as traditional financial businesses and are accompanied by the same types of financial risks, they should adhere to the same regulatory requirements.
Second, the flexibility principle. Regulatory authorities in different economies may apply existing laws and regulations to the crypto asset industry or create new laws and regulations to implement relevant regulatory suggestions.
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.
Second, the content of regulatory suggestions.
Two regulatory suggestions provide specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(1) (High-level suggestions on monitoring, supervision, and regulation of crypto asset businesses and markets) (CA Suggestions)
The CA suggestions comprise 9 high-level recommendations.
1. Regulatory Powers and Tools. Regulatory authorities should possess 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 proportional to the risks of crypto assets based on the principle of 'same business, same risk, same regulation'. This includes formulating regulatory policies that match their risk, scale, complexity, and systemic importance; assessing whether current regulatory measures can address financial stability risks posed by crypto assets and expanding or adjusting the regulatory scope as appropriate; aligning regulatory standards for the crypto asset market with those of the traditional financial market 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, facilitating efficient domestic and international communication, information sharing, and consultation to promote regulatory consistency.
4. Governance framework. Crypto asset issuers and service providers should develop and publicly disclose comprehensive governance frameworks that match their risks, scale, complexity, and systemic importance, including 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; possess reputable management that can effectively oversee compliance issues; establish emergency plans and business continuity plans (BCP), comply with relevant anti-money laundering requirements set forth by the Financial Action Task Force (FATF), protect client assets, and reduce the risks of client assets being damaged, misused, or unable to be redeemed in a timely manner.
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 reliable data quality; be able to report relevant data in a comprehensive, timely, accurate, and continuous manner; support data sharing across economies 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 operations, transactions, management, and risk characteristics of products; terms of custody relationships, measures to protect client assets, and risks of custodian bankruptcy; significant technological risks, such as cybersecurity risks and environmental climate risks.
8. Address financial stability risks arising from the links 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 establish an organizational management system that aligns with their overall strategy and risk profile; when service providers fail to comply with existing regulations or create serious conflicts of interest, strong measures should be taken according to the law; closely monitor concentration risks and related party transaction risks, and impose additional prudential regulatory requirements if necessary; require cross-border service providers to share information to prevent the spread of risks overseas.
(2) (High-level suggestions on the regulation of 'global stablecoins') (GSC Suggestions)
The GSC suggestions encompass 10 high-level recommendations, which, in addition to similar regulatory powers, governance frameworks, risk management, and other requirements as the CA suggestions, also include 3 additional recommendations.
1. Recovery and Resolution Plans. 'Global stablecoins' should develop appropriate recovery and resolution plans that support orderly liquidation or resolution 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 concerning the issuers or underlying reserve assets of 'global stablecoins', ensuring timely redemption: inform users of the redemption process, redemption fees, and claims status, including how to ensure smooth redemption under stress scenarios; reserve assets should equal the amount of circulating stablecoins, composed of high-quality, highly liquid assets that are unencumbered, easily liquidated, and not subject to depreciation. 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 address outflows.
3. Pre-operational regulatory requirements. 'Global stablecoins' should meet the market access requirements of the economy they operate in (such as licenses or registrations) before commencing operations and develop necessary products and systems to adapt to new regulatory requirements.
Three, work progress and future outlook
Follow up on member policy implementation. Track major market and regulatory dynamics since the release of regulatory suggestions, summarizing the implementation progress, experiences, practices, and challenges faced by FSB members regarding crypto assets and 'global stablecoins' high-level regulatory suggestions.
Evaluate the implementation effectiveness of regulatory suggestions. By the end of 2025, collaborate with relevant international organizations to assess member economies' execution of regulatory suggestions, ensuring comprehensive and consistent implementation of regulatory suggestions, and determining whether updates to the suggestions are necessary.
Continue to study and improve regulatory policies. Research potential financial risks associated with 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 joint measures with relevant standard-setting bodies and other international organizations to promote the effective execution of regulatory suggestions in non-FSB member economies, reducing regulatory arbitrage risks. 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.
Original link: http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/5547040/index.html