FSB Tackles Regulatory Arbitrage in Final Recommendation
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FSB Tackles Regulatory Arbitrage in Final Recommendation

The financial oversight arm of G20 nations finalized its cryptocurrency regulation framework.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

After being tasked by the G20 group, the Swiss-based Financial Stability Board (FSB) delivered recommendations to regulate crypto-activities on Monday. FSB is the organization responsible for determining globally systemic banks (G-SIBs). 

Closely tied to the Bank for International Settlements (BIS), the two organizations work in tandem to root out threats to financial stability, with FSB created in the wake of the 2008 financial crisis.

In the latest 13-page set of guidelines, FSB focuses on equalizing regulations present in TradFi to the crypto space. The underlying principle behind the framework is “same activity, same risk, same regulation.”

FSB’s Call to Action

Expectedly, FSB refers to a string of crypto bankruptcies in 2022, from Terra and Celsius to AC3 and FTX, as the starting point for the need to mitigate global financial risk.

“Most failed market participants, including those behind TerraUSD/LUNA, Celsius Network, and FTX, engaged in functions similar to those of traditional finance.”

Discerning between cryptocurrencies and stablecoins, FSB divided its recommendations into two categories:

  • Broadly generalized recommendations (high-level) to be adopted by G20 nations regarding oversight and regulation of crypto-asset activities (CA).
  • Revamped generalized recommendations on overseeing and regulating global stablecoin (GSC).

This is a continuation of FSB’s initially proposed framework delivered in October 2022, after which the board churned out received feedback. Although put forward by FSB, the final regulatory framework for crypto-assets has been crafted in cooperation with the Bank for International Settlements (BIS), Financial Action Task Force (FATF), the International Monetary Fund (IMF), World Bank and other global financial pillars. 

Due to its high-level nature, the FSB’s crypto framework is flexible, making it suitable for implementation across different G20 jurisdictions. At their local level, sectoral standard-setting bodies (SSBs) will develop granular laws derived from FSB’s recommendations. 

In total, the FSB accounted for 12 regulatory principles, divided between the aforementioned global stablecoin (GSC) and crypto-asset (CA) recommendations.

Image courtesy of FSB

Key FSB Enforcement Points

When G20 countries make crypto-related laws in the future, they will take into account these FSB recommendations:

Segregation of crypto assets by financial service providers. This means that crypto exchanges can no longer blend customer assets with their proprietary assets. For instance, Crypto.com and Binance have their proprietary tokens, just like FTX had one. 

Enforcing this rule means that these platforms could no longer misuse customer funds for the risky purpose of leverage and re-use. 

Segregation of functions for crypto service providers. As FTX and Alameda Research demonstrated, some platforms are set up obfuscated to finance each other, leading to “acute conflicts of interest.” 

To prevent contagion events, FSB recommends that each function be legally separated and brought in compliance with existing supervision and oversight. 

Lastly, as crypto service providers tend to migrate to less-regulated jurisdictions, FSB recommends strong measures against such regulatory arbitrage. This includes information sharing applied to global-level compliance, especially in those jurisdictions that have yet to implement international standards.

In other words, the conglomerate of global bodies (FSB/IMF/World Bank) will pressure non-FSB jurisdictions to equalize TradFi oversight with crypto-activities.

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What About DeFi and CBDCs?

Regarding decentralized finance (DeFi) protocols, FSB expects to deliver the report by the end of 2024. The International Organization of Securities Commissions (IOSCO) will play a big role here, expected to deliver final DeFi policy recommendations by the end of 2023.

In the meantime, the same high-level recommendations will also apply to DeFi, including a strong focus on cross-border information sharing against regulatory arbitrage. The report will include global financial stability implications on all DeFi activities – borrowing, lending, and trading. 

Central Bank Digital Currencies (CBDCs) are exempt from FSB recommendations due to being an expression of central banking liability. Besides that, FSB guidelines are to be taken irrespective of the technology used. Instead, stablecoins and crypto-asset activities must be regulated “based on their economic functions and risks.”

By September 2023, the IMF and FSB will jointly deliver a report to pave the road for a “comprehensive policy approach to crypto assets.” By the end of 2025, the FSB will review implementation on localized levels. The world’s financial oversight bodies will then pinpoint challenges that result from crypto-asset activities conducted in non-FSB member jurisdictions.

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Do you think Congress failed to deliver any crypto regulation because it waited for international guidelines? Let us know in the comments below.