Published: July 19th, 2023
The G20’s finance watchdog is warning that wider systemic risk is on the cards if crypto firms aren’t reined in, and soon.
The Financial Stability Board (FSB) said on Monday that the continuing fallout from recent crypto catastrophes demands that financial regulators obtain greater oversight of the industry. The agency’s just-published global regulatory framework for crypto-assets was strongly influenced by last year’s crypto failures, specifically the collapse of FTX and Terra.
To grapple with those risks, the FSB has listed nine core recommendations for financial regulators as they attempt to control how crypto companies and markets operate. The agency has also revised its guidance on regulatory rules for stablecoins.
The recommendations, which incorporate industry and investor feedback gathered during a public consultation on the topic, say there must be greater cross-border collaboration between national and international agencies, mandatory disclosures for traders and investment firms, and more stringent governance for crypto issuers.
The FSB said its suggestions had become ‘more robust’ in the aftermath of recent crypto events, and now incorporate a push for stronger safeguarding of client assets, as well as measures to mitigate conflicts of interest.
‘The large-scale failures we’ve seen over the last 18 months spotlight how volatile crypto assets can be and point to structural vulnerabilities that could damage investors large and small,’ the Zurich-based agency said in a statement. ‘They also demonstrate how quickly failure in one part of the crypto-asset ecosystem can turn into contagion and contaminate other parts.’
The agency added that it expects more spillover of crises to occur as the crypto and traditional finance worlds become more intertwined.
While traditionalists may look at the wave of crypto enforcements actions taking place across the globe with distress, there are signs that well-regulated markets for digital assets could also open the door to greater adoption.
In early July, Britain’s new Financial Services and Markets Act 2023 officially became the law of the land this week, recognizing crypto trading as a regulated and legitimate financial services activity. The UK reform bill, which was given Royal Assent by King Charles on Tuesday, was described in a Westminster press release as having the potential to give Britain's economy ‘a rocket boost.’
Under the new law, cryptocurrency trading can now be subject to rules and regulations designed to protect investors, levelling the playing field by adding transparency, standard definitions, and risk mitigation to crypto trades. The amended Act defines digital assets as ‘cryptographically secured digital representations of contractual rights or underlying value,’ and labels them as regulated financial products, investments, or instruments.
The Treasury press release noted that the goal of the law is to regulate how crypto assets are traded and held in custody and ensure their safe adoption in the country. The new law is being touted by the government of Prime Minister Rishi Sunak as a much-needed modernisation of Britain’s financial-services dependent economy.
‘This new law enables us to take back control of the UK's financial services regulatory regime,' said Economic Secretary to the Treasury Andrew Griffith. ‘By replacing old EU laws set by bureaucrats in Brussels it has the potential to free up billions of Pounds in investment, money that could spur innovation and drive economic growth’.
In Britain's parliamentary procedure for enacting new laws, Royal Assent is the end of the legal process that makes a proposed bill the law of the land, turning it into an Act of Parliament. The bill passed a vote in the House of Commons and was approved by the House of Lords in late June.
It was the first upbeat news on crypto’s regulatory front since the FTX meltdown spurred a wave of enforcement actions by American financial watchdogs, in particular the Securities and Exchange Commission (SEC).
In early June, the price of Bitcoin fell sharply and triggered an overall plunge in crypto markets after the SEC began enforcement action against Binance, the world’s biggest crypto exchange.
In the view of regulators, the company ‘demonstrated utter disregard for American securities law.’ The SEC’s filing said Binance had 'illegally tried to convince US crypto traders to buy, sell, and trade digital assets’ which the SEC says are ‘securities’ under US law.
The agency’s lawsuit alleges that in December 2018, Binance’s Chief Commerical Officer (CCO) admitted the company was running afoul of US securities law.
‘We are operating a f****g unlicensed securities exchange in the USA bruh,” the executive said in an email to Binance’s compliance officer.
In a separate filing also made on 5th June, the SEC added several leading cryptocurrencies, including Solana, Cardano, and Binance’s own Binance Coin (BNB) to the list of securities that fall under its jurisdiction.
In total, the agency said 12 separate tokens being traded on Binance were classed as securities. Crypto market watchers have noted that most of the 12 fetch minimal volumes and depend on Binance for the lion’s share of their liquidity.
In June, data from CoinGecko showed that more than USD 11 billion in trades had occurred on Binance in one 24-hour period.
The world's leading crypto exchange has often failed to inspire confidence amongst regulators and even business partners. In May of this year the company announced it would end deposits and withdrawals in Sterling from 22nd May.
At time of writing, new Binance accounts were restricted from making GBP deposits, though the company said in its email that current users would still be able to access their GBP balances until the May deadline.
According to the company, the change affected less than one per cent of Binance customers. But it wasn’t the first time the exchange had difficulties accommodating trades in GBP.
Binance added its first Sterling trading pairs in 2020, ahead of the launch of its UK trading platform. At the time, British citizens could trade Pounds for crypto through the Binance Jersey subsidiary, an entity incorporated in the UK's Channel Islands low-tax jurisdiction.