Article republished 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 strengthen their regulatory efforts on crypto assets. After a series of risk events in the crypto asset market in 2022, 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 of crypto assets on financial system stability, regulatory authorities in various countries have continuously increased their regulatory efforts. Currently, 51 countries and regions globally have implemented prohibitive regulations on crypto assets, and some economies have adjusted existing laws or re-legislated regulations.
The United States regulates the actions of crypto asset issuers violating (Securities Law) based on existing regulatory regulations. The U.S. Securities and Exchange Commission (SEC) 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 has approved or recognized Bitcoin products, and investors should remain cautious about the risks associated with Bitcoin and products linked to the value of crypto assets.
The European Union has approved the (Regulation on Markets in Crypto-assets), 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 pace for virtual assets, enacting the (Financial Services and Markets Act), bringing crypto assets within 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 (Fund Settlement Act), limiting the issuers of stablecoins to licensed banks, registered transfer agents, and trust companies.
Hong Kong, China, actively explores crypto asset licensing management. 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 (Securities and Futures Ordinance) regulation and licensing, and 'non-security tokens' are subject to (Anti-Money Laundering Ordinance) regulation and licensing. Institutions engaged in virtual asset businesses must apply for registration licenses from the relevant regulatory authorities to operate. At the same time, large financial institutions like HSBC and Standard Chartered Bank are required to include cryptocurrency exchanges in their daily customer regulatory scope.
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. However, as the applications of crypto assets increase in payment and retail investment scenarios, crypto assets may pose risks in certain economies.
The FSB and relevant standard-setting bodies have jointly developed a global regulatory framework for crypto assets, guiding regulatory authorities to address financial stability risks associated with crypto assets based on the principle of 'same activity, same risk, same regulation.'
The IMF and FSB have developed a roadmap for regulatory policies to identify and address macroeconomic and financial stability risks posed by crypto assets. The roadmap outlines the work related to the implementation of the regulatory policy framework for crypto assets, aiming to promote global information sharing and cooperation, filling the data gaps required by the rapidly changing crypto asset ecosystem.
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The Financial Stability Board issued 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 loopholes, preventing regulatory arbitrage, and effectively mitigating financial risks.
One, overall principles of the two regulatory recommendations.
First, the principle of 'same business, same risk, same regulation.' If crypto assets and 'Global Stablecoins' 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.
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 technology.
Two, content of regulatory recommendations.
Two regulatory recommendations propose specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(High-level recommendations for 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 instance, formulate regulatory policies that match their risks, size, 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, adequately protecting the interests of all relevant parties.
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 advance regulatory consistency.
4. Governance framework. Crypto asset issuers and service providers should develop and disclose a comprehensive governance framework that matches their risk, size, complexity, and systemic importance, along with clear accountability mechanisms and procedures to identify, address, and manage 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; having reputable management capable of effectively overseeing compliance issues; establishing emergency plans and business continuity plans (BCP), complying with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protecting customer assets and reducing the risks of customer assets being damaged, misused, or unable to be redeemed on time.
6. Data management. Crypto asset issuers and service providers should establish comprehensive data management systems: ensuring data integrity and security, complying with data security-related laws and regulations; promptly correcting erroneous data to ensure reliable data quality; 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. Crypto asset issuers and service providers should ensure sufficient information disclosure. The disclosed information should include necessary information such as operational, trading, management, and product risk characteristics; terms of custody relationships, customer asset protection measures, and the risks of custodian bankruptcy; significant technological risks, such as cybersecurity risks and environmental climate risks.
8. Addressing 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 multifunctional crypto asset service providers. Regulatory authorities should require service providers to build organizational management systems that align with their overall strategy and risk status; when service providers fail to comply with existing regulations or create severe conflicts of interest, strong measures should be taken in accordance with the law; closely prevent concentration risk and related transaction risk, and, if necessary, additional prudential regulatory requirements should be established; require cross-border service providers to share information to prevent risk spillover abroad.
(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 aspects similar to the CA recommendations on regulatory powers, governance frameworks, risk management, etc., and also propose 3 separate recommendations.
1. Recovery and resolution plans. 'Global stablecoins' should develop appropriate recovery and resolution plans to support orderly liquidation or resolution within a 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 of 'Global Stablecoins' or the underlying reserve assets, ensuring timely redemptions: explain to users the redemption procedures, redemption fees, and claims situations, including how to ensure smooth redemptions under stressed scenarios; reserve assets should equal the amount of stablecoins in circulation, consisting of unencumbered, easily liquidated, and high-quality, highly liquid assets. 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), maintaining sufficient liquidity to address fund outflows.
3. Pre-operation regulatory requirements. 'Global stablecoins' should meet the market entry requirements of the economy in which they operate (such as licenses or registrations) before commencing operations, and build necessary products and systems that adapt to new regulatory requirements.
Three, work progress and future outlook.
Follow up on member policy implementation. Track the major market and regulatory dynamics since the release of the regulatory recommendations, summarizing the implementation progress, experiences, and challenges faced by FSB members in implementing high-level regulatory recommendations for crypto assets and 'Global Stablecoins.'
Assess the effectiveness of regulatory recommendation implementation. By the end of 2025, cooperate with relevant international organizations to assess member economies' implementation of regulatory recommendations, ensuring comprehensive and consistent implementation, and determine whether there is a need to update the recommendations.
Continue to study and improve regulatory policies. Research potential financial risks of multifunctional 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 implementation of regulatory recommendations in non-FSB member economies, 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 scope of cross-border monitoring of crypto assets.