Cryptoasset companies should set aside capital like banks do when undertaking similar activities, regulators proposed in their first global rules on Tuesday as a “crypto winter” that wipes out $2 trillion from the sector, leaving investors incurring losses.
The Financial Stability Board (FSB), which coordinates financial regulation among the Group of 20 Economies (G20), has made nine recommendations for members to adopt.
Currently, the industry is largely unregulated in most countries and only needs to comply with money laundering and terrorist financing protection rules as regulators warn investors that they risk losing every penny.
Klaas Knot, the president of the Dutch Central Bank who chairs the FSB, said the “crypto winter” or the recent sharp decline in cryptocurrencies has strengthened the council’s assessment of existing structural vulnerabilities.
The FSB has said that cryptocurrencies, which have a combined value of about $935 billion from $3 trillion at their peak in November last year, are not big enough to threaten financial stability, but rules were needed to ensure a likely recovery. to regulate.
“Concerns about the risks they pose to financial stability are therefore likely to come to the fore sooner rather than later,” Knot said in a letter to G20 finance ministers in Washington this week.
FSB recommends establishing a framework for overseeing and managing risk and data at crypto firms, and planning for a smooth shutdown of troubled crypto asset firms.
“Several crypto asset lenders have failed during the recent market turmoil due to run vulnerability, thin capitalization, concentrated exposure to risky entities, and risky trading and corporate ventures,” the FSB said.
The proposals aim for cross-border consistency in regulating crypto assets, especially as the European Union finalizes groundbreaking rules to regulate the sector from 2024.
The underlying principle is that the same activity must be regulated in the same way whether it is performed by a crypto asset company, bank or payment provider, and crypto companies may need to separate some functions to ensure this, according to the FSB.
The proposals have been submitted to public consultation until December 15, before being finalized in mid-2023, when FSB members are expected to accelerate their implementation.
The FSB has also revised its guidelines for regulating stablecoins, a type of cryptocurrency usually backed by a currency such as the dollar or assets.
The crash of the dollar-backed Terra stablecoin in May highlighted the high risk of loss and potential vulnerability of stablecoins that lack a stabilization mechanism, the FSB said.
The watchdog said most of the existing stablecoins do not comply with the guidelines and it proposed revisions to the guidelines, including strengthening the governance and stabilization mechanisms of stablecoins, and clarifying and strengthening redemption rights.