Summary:
- CCI released its Global Regulatory Blueprint for building a Web3 regulatory framework for policymakers worldwide.
- This is the first framework of its kind and was written by experts in crypto, law, regulation and policy.
- It was included in CCI’s a response letter to the FSB on its proposed regulations and questions on crypto-assets and global stablecoins.
- The FSB plans to finalize their proposals by July 2023 and to allocate greater attention to crypto trading platforms and DeFi moving forward.
Experts from law, policy, regulation and crypto pieced together the first crypto framework in response to the FSB’s request.
Background: What is the FSB and Why Does it Matter?
On October 11, 2022, the Financial Stability Board (FSB) released a proposed framework for the international regulation of crypto-asset (CA) activities, including recommendations for regulating global stablecoins (GSCs). We’ve written about what’s covered in this framework, which includes regulatory powers, disclosures, and risk requirements.
The Financial Stability Board (FSB) is an international organization that monitors and makes recommendations about the global financial system in order to promote financial stability. It is primarily comprised of central banks, finance ministries, and financial regulatory agencies from G20 member countries around the world.
The FSB is important because it plays a key role in shaping the regulatory environment for the global financial sector, which includes the regulation of crypto-assets and stablecoins. Its recommendations are widely followed by national regulators and have the potential to impact the stability and integrity of the global financial system.
It has been extremely thoughtful in its considerations of crypto-assets and stablecoins and first released a report outlining the financial stability implications of crypto-asset market activities over four years ago. This work has continued, and in its February 2022 report, the organization noted that crypto-asset markets are quickly evolving and could, at one point, represent a threat to global stability due to their scale and interconnectedness with the traditional financial system.
Highlights from Our Letter — A Global Regulatory Blueprint
We recently submitted a letter in response to the FSB’s questions of October 11, 2022, for consultation on a set of recommendations and questions regarding the international regulation of crypto-asset (CA) activities and global stablecoins (GSCs).
CA activities are broad in scope and involve thoughtful policy creation in numerous fields – ranging from technical standards to illicit finance and everything in between. Consequently, we created a Global Regulatory Blueprint, which elaborates on foundational principles we believe are necessary first building blocks for a flourishing crypto and Web3 ecosystem.
The principles outlined in our Global Regulatory Blueprint expressed to the FSB are by no means static nor exhaustive. As the space continues to evolve, we anticipate supplementing and updating our principles accordingly. Underlying all our principles is an approach that promotes “responsible innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.”
The sections below give a sampling of a couple of principles from CCI’s Global Regulatory Blueprint.
Customer Disclosures
One of our principles that exemplifies this approach we’ve shared with the FSB involves customer disclosures. Centralized exchanges should abide by a system of transparency whereby customers feel confident in their CAs and the exchange.
Exchanges should provide clear disclosures to customers as to the terms and conditions of their accounts.
Additionally, issuers should improve their disclosures to help their users to make informed decisions about their investments based on individual preferences. In a forthcoming paper, we’ll elaborate on more of these risk management principles for centralized exchanges.
Stablecoin Development
Balancing responsible innovation with sufficient flexibility necessitates using the right tool for the job at hand; not every problem is a nail that requires a blunt hammer. While we respectfully note the FSB’s concerns regarding algorithmic stablecoins, we think their proposal for a blanket ban on these stablecoins could lead to unintended consequences on the wider crypto ecosystem.
While some algorithmic stablecoins have failed in the past, these failures can often be attributed to issues with collateralization or issuer under-collateralization. Existing regulations can be utilized to prevent harm, and new regulations specifically targeted at collateralization requirements can help to create a safe environment for the development of algorithmic stablecoins without hindering innovation.
We’ve expressed to the FSB a regulatory framework for algorithmic stablecoins that recognizes the important role of algorithms and digital assets. Regulation should prevent stablecoin issuers from taking on unreasonable amounts of risk, and lawmakers can protect users without such broad bans by enacting narrowly tailored collateralization requirements that allow for the development of safe software code.
Algorithms are also crucial for other aspects of the blockchain ecosystem, such as decentralized finance (DeFi) and Web3, and a blanket ban could be seen as an attack on these mechanisms and potentially hinder the development of Web3.
What’s Next?
The FSB aims to finalize the updated recommendations after taking into account comment letters like ours by July 2023. Additionally, the FSB aims to review progress in the implementation of its final recommendations by the end of 2025.
We anticipate the FSB to allocate more attention to DeFi; the organization mentioned in a meeting in Basel less than a month ago that it aims to enhance its CA monitoring framework to include DeFi-specific vulnerability indicators. Additionally, the FSB noted that while financial stability risks to date remain limited in the context of DeFi and cryptocurrency markets, growing linkages of crypto firms with core financial markets increase the risk of spillovers. The FSB at its Plenary meeting in Basel also noted they would be monitoring crypto trading platforms.
CCI plans on incorporating additional DeFi principles into its Global Regulatory Blueprint in the next few months, which can assist policymakers and organizations like the FSB, as DeFi becomes more prominently used.
