Cross-Border Payment Shortcomings Helped Crypto’s Adoption: FSB
Klaas Knot, Chair of the Financial Stability Board (FSB), has said that some unfortunate events last year, including the collapse of some high-profile crypto companies, highlighted the intrinsic volatility of the industry in a letter to G20 finance ministries and Central Banks. He added that FSB’s recommendations for crypto regulation would come this year—though many stablecoins would not meet them.
Interestingly, Knot also stated that shortcomings in the existing system of cross-border payments led to the development and adoption of the crypto ecosystem, and that the FSB wants to make them cheaper, faster, and more accessible.
FSB to Finalize its Global Crypto Regulation Recommendations
FSB Chair Klaas Knot has outlined work priorities for 2023 in a recent letter to G20 finance ministers and central bank governors. The letter also touched on the matter of cryptocurrencies and stablecoins, underscoring the need for better regulation in a bid to mitigate any possible risks that could spill over onto the broader financial system.
Knot said the FSB would finalize its recommendations for regulating crypto-assets and stablecoins this year. The recommendations for stablecoin regulation include “guidance to strengthen governance frameworks, clarify and strengthen the redemption rights” as well as having robust stabilization mechanisms.
However, the FSB said many stablecoins today would not meet these “high-level” recommendations. It said:
“The FSB’s work concludes that many existing stablecoins would not currently meet these high-level recommendations, nor would they meet the international standards and supplementary, more detailed BIS Committee on Payments and Market Infrastructures-International Organization of Securities Commissions guidance.”
Knot also said they are delivering a report on the emerging decentralized finance (DeFi) market in the upcoming G20 meeting. He detailed that the report will put in recommendations needed to cover DeFi risks, which include proactive monitoring and filling data gaps.
The FSB is a global organization that regulates and makes recommendations regarding the global financial system. The organization’s membership spans central banks, ministries of finance, supervisors of financial institutions, international financial organizations, and market regulators, making it one of the most powerful financial regulators worldwide.
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Shortcomings in Cross-Border Payments Spurred Growth in Crypto
In the letter, Knot attributed the tremendous growth in crypto assets partly to shortcomings in the existing system of cross-border payments. He said the dissatisfaction with this system forced many to look for better alternatives.
“One factor that has helped spur the development of the crypto-asset ecosystem is dissatisfaction with the existing system of cross-border payments. In 2020, G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments, in order to address the frictions that such payments currently face and thereby achieve faster, cheaper, more transparent and more inclusive cross-border payment services.”
Crypto payments are usually fast, cheap, and seamless as they are processed on a decentralized ledger. There is no need for third parties and intermediaries to take a cut of the transaction.
In contrast, in a traditional cross-border payment, several banks would need to get involved. Each of these banks needs to record transactions on multiple ledgers on multiple systems developed using different technologies, which makes transactions slower and more expensive.
Notably, the FSB is not the only high-profile global organization highlighting the inefficiencies in cross-border payments. As reported, the Bank of International Settlements (BIS) has proposed the idea of multi-CBDCs to address these inefficiencies.
Similarly, in May last year, SWIFT’s Chief Innovation Officer Thomas Zschach said he believes different systems of CBDCs can work together for “frictionless” cross-border transactions.
The FSB said it has laid out “high-priority, practical steps” to help tackle the issues with the existing system of cross-border payments in a letter to G20. Furthermore, the organization said it would work along two yet-to-be-launched taskforces and the private sector to implement new changes in cross-border payments.
Do you think the FSB will further the regulatory scrutiny of stablecoins with its upcoming recommendations? Let us know in the comments below.