Regulators Propose First Global Rules Before ‘Crypto Winter’ Thaw

Crypto winter” wiped $2 trillion off the sector, leaving investors nursing losses

Cryptoasset companies should set aside capital like banks when undertaking similar activities, regulators proposed on Tuesday in their first global rules as a “crypto winter” wiped $2 trillion off the sector, leaving investors nursing losses.

The Financial Stability Board (FSB), which coordinates financial rulemaking among Group of 20 Economies (G20), made nine recommendations for members to apply.

Currently, the sector is largely unregulated in most countries, having to only comply with rules for safeguarding against money laundering and terrorist financing as regulators warn investors they risk losing every penny.

Klaas Knot, the Dutch central bank president who chairs the FSB, said the “crypto winter” or recent sharp pullback in cryptocurrencies, has reinforced the board’s assessment of existing structural vulnerabilities.

The FSB has said crypto, which has a combined value of about $935 billion versus $3 trillion at their peak in November last year, are not big enough to threaten financial stability, but rules were needed to regulate a likely recovery.

“Concerns in regards to the dangers they pose to monetary stability are subsequently more likely to come again to the fore sooner slightly than later,” Knot said in a letter to G20 finance ministers meeting in Washington this week.

FSB recommends putting in place a framework for oversight, and managing risks and data at crypto firms, and having plans in place for a smooth shutting down of cryptoasset firms in trouble.

“Several crypto-asset lenders failed throughout the current market turmoil because of vulnerability to runs, skinny capitalisation, concentrated exposures to dangerous entities, and dangerous buying and selling and enterprise ventures,” the FSB mentioned.

The proposals search cross-border consistency to regulating crypto-assets, significantly because the European Union finalises groundbreaking guidelines to manage the sector from 2024.

The underlying precept is that the identical exercise must be regulated in the identical means, whether or not undertaken by a cryptoasset firm, financial institution or funds supplier, and that crypto corporations might have to separate some features to make sure this, the FSB mentioned.

The proposals have been put out to public session till Dec. 15, earlier than being finalised by mid-2023, when FSB members could be anticipated to fast-track their implementation.

The FSB additionally reviewed its steerage on regulating stablecoins, a kind of cryptocurrency often backed by a foreign money just like the greenback or property.

The crash of the dollar-backed Terra stablecoin in May highlighted the excessive danger of loss and potential fragility of stablecoins that lack a stabilisation mechanism, the FSB mentioned.

The watchdog mentioned that almost all present stablecoins do not meet its steerage and it proposed revisions to the steerage embrace strengthening governance and stabilisation mechanisms of stablecoins, and clarifying and strengthening redemption rights.

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