FSB Report on Crypto Regulations Explained

The Financial Stability Board (FSB), a global financial authority, proposed a regulatory framework for cryptocurrencies to the nations with the 20 largest economies (known as the G-20 nations), outlining concerns about crypto markets and activities. The proposal calls for stricter regulation of crypto assets, namely stablecoins, and a clear framework outlining risks and compliance for crypto regulation.

The report was submitted in October 2022 by the chairman of the FSB ahead of meetings with key leaders in Washington, D.C., as well as the upcoming G-20 worldwide summit for 2022. The report also includes a list of questions for public comment to help shape the proposed set of regulations.

Current Regulatory Issues for Crypto Assets

The report, titled International Regulation of Crypto-asset Activities, first outlines the current challenges and risks of regulations in the cryptocurrency space, stating that “many crypto-asset activities and markets are not compliant with applicable regulations or are unregulated.”

The report goes on to detail the reasons for a strong stance on crypto regulation. With the current crypto winter in full swing, investors have seen their holdings diminish—and, in some cases, disappear—due to the risks taken by some crypto companies. The FSB states, “These vulnerabilities were amplified by a lack of transparency and disclosures, flawed governance, inadequate consumer and investor protections, and weaknesses in risk management.”

Stablecoins are in the crosshairs of the FSB report, “as they could pose significant risks to financial stability.” The FSB’s harsh stance on stablecoins is congruent with its call for regulation on stablecoins in July 2022. As stablecoins attempt to mirror pricing of real-world assets (such as the U.S. dollar), this is seen as a threat to current central banks and national financial systems.

The report also attempts to parse some of the intricacies of the many functions of crypto assets, as some cryptocurrencies are compliant with current regulations, while others are not. Another challenge is the lack of classification for crypto assets, making regulation difficult.

One of the biggest challenges is that crypto companies may offer multiple use cases (such as trading, lending, custody, and brokerage services) that should be regulated individually. Traditional finance companies that offer these services are typically regulated as discrete providers of the services, instead of under a single company umbrella. 

Finally, the report states, “the cross-border nature of crypto-assets raises regulatory, supervisory and enforcement challenges.”

Proposed Approach for a Regulatory Framework

The FSB proposes an approach to build a regulatory framework for crypto assets, starting with the principle of “same activity, same risk, same regulation.” This means applying existing regulations from the traditional finance world to crypto assets and crypto companies that offer financial services, such as lending, trading, and brokerage services.

There are two main proposals in the report:

Regulation and oversight: The FSB is building a comprehensive set of proposed recommendations for “the regulation, supervision and oversight of crypto-asset activities and markets.” These recommendations will continue to evolve but are designed to help G-20 countries create clear international regulations to govern all cryptocurrencies and intermediaries (such as crypto exchanges).

Additions to the Stablecoin Arrangement: The Stablecoin Arrangement is a document created by the FSB that includes numerous updates in the latest proposal, including “requiring these stablecoin issuers to provide robust legal claim, guarantee timely redemption at par into fiat, and maintain effective stabilisation mechanisms, among other revisions.” Effectively, the FSB is recommending the centralization of stablecoin governance, with accountable parties for regulation, as well as guaranteed timely redemption for users who want to exchange into fiat currency.

The FSB is calling for the G-20 nations to take crypto regulation seriously, and to act swiftly to impose the same regulations that traditional financial markets have on crypto assets. The board is also calling for regulation unique to cryptocurrencies, as some of their uses and functionality are very different from any traditional asset.

The Bottom Line

The FSB report says that its regulation proposals will be finalized in mid-2023. These proposals will give a clear direction for regulators and policy makers on how to legally rein in cryptocurrencies and intermediaries that provide crypto-related services. While the FSB is focused on crypto market activities and stablecoins, it will continue to monitor the activities of decentralized finance (DeFi) markets and companies as well.

The FSB is taking a harsh stance on crypto, specifically stablecoins, due to the huge risks involved in such pegged assets. It calls out Terra (LUNA) in particular, as it is the most egregious example to date of a highly risky stablecoin collapsing and erasing billions in value seemingly overnight. The FSB will continue to offer guidance to global financial regulators ahead of finalizing these regulatory proposals in 2023.