The Financial Stability Board (FSB) has published a new global regulatory framework for crypto-asset activities.

The organisation, which promotes international financial stability by coordinating national financial authorities, said that events over the past year had highlight the “intrinsic volatility and structural vulnerabilities of crypto-assets and related platers”.

The comments come after the collapse of several high profile crypto firms, including the £32 billion valued cryptocurrency exchange FTX. Crypto lender Genesis also filed for bankruptcy earlier this year, while BlockFi filed towards the end of last year.

“They have also illustrated that the failure of a key service provider in the crypto-asset ecosystem can quickly transmit risks to other parts of that ecosystem,” said FSB. “As recent events have illustrated, if linkages to traditional finance were to grow further, spillovers from crypto-asset markets into the broader financial system could increase.”

The new framework, which was commissioned by the G20, takes account of lessons from events of the past year in crypto-asset markets and feedback received during the FSB’s public consultation.

The FSB said that its final recommendations draw on the implementation experiences of jurisdictions and build on the principles – ‘same activity, same risk, same regulation’; high-level and flexible; and technology neutral – that informed the consultative framework.

The organisation said that it has strengthened its recommendations across three areas:
ensuring adequate safeguarding of client assets; addressing risks associated with conflicts of interest; and strengthening cross-border cooperation.

The final recommendations are as follows:

Recommendation 1: Authorities’ readiness to regulate and supervise global stablecoin arrangements

Authorities should have and utilise the appropriate powers and tools, and adequate resources, to comprehensively regulate, supervise, and oversee a GSC arrangement and its associated functions and activities, and enforce relevant laws and regulations effectively.

Recommendation 2: Comprehensive oversight of GSC activities and functions

Authorities should apply comprehensive and effective regulatory, supervisory and oversight requirements consistent with international standards to GSC arrangements on a functional basis and proportionate to their risks insofar as such requirements are consistent with their respective mandates.

Recommendation 3: Cross-border cooperation, coordination and information sharing

Authorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication, information sharing and consultation in order to support each other in fulfilling their respective mandates and to ensure comprehensive regulation, supervision, and oversight of a GSC arrangement across borders and sectors, and to encourage consistency of regulatory and supervisory outcomes.

Recommendation 4: Governance structures and decentralised operations

Authorities should require that GSC arrangements have in place and disclose a comprehensive governance framework with clear and direct lines of responsibility and accountability for all functions and activities within the GSC arrangement.

Recommendation 5: Risk management

Authorities should require that GSC arrangements have effective risk management frameworks in place that comprehensively address all material risks associated with their functions and activities, especially with regard to operational resilience, cyber security safeguards and AML/CFT measures, as well as “fit and proper” requirements, if applicable, and consistent with jurisdictions’ laws and regulations.

Recommendation 6: Data storage and access to data

Authorities should require that GSC arrangements have in place robust frameworks, including systems and processes for the collecting, storing, safeguarding and timely and accurate reporting of data. Authorities should have access to the data as necessary and appropriate to fulfil their regulatory, supervisory and oversight mandates.

Recommendation 7: Recovery and resolution of the GSC

Authorities should require that GSC arrangements have appropriate recovery and resolution plans.

Recommendation 8: Disclosures

Authorities should require that GSC issuers and, where applicable, other participants in the GSC arrangements provide all users and relevant stakeholders with comprehensive and transparent information to understand the functioning of the GSC arrangement, including with respect to the governance framework, any conflicts of interest and their management, redemption rights, stabilisation mechanism, operations, risk management framework and financial condition.

Recommendation 9: Redemption rights, stabilisation, and prudential requirements

Authorities should require that GSC arrangements provide a robust legal claim to all users against the issuer and/or underlying reserve assets and guarantee timely redemption. For GSCs referenced to a single fiat currency, redemption should be at par into fiat. To maintain a stable value at all times and mitigate the risks of runs, authorities should require GSC arrangements to have an effective stabilisation mechanism, clear redemption rights and meet prudential requirements.

Recommendation 10: Conformance with regulatory, supervisory and oversight requirements before commencing operations

Authorities should require that GSC arrangements meet all applicable regulatory, supervisory and oversight requirements of a particular jurisdiction before commencing any operations in that jurisdiction and adapt to new regulatory requirements as necessary and as appropriate.

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