Promoting the sustainable development of cryptocurrencies by Global Regulators
The emerging global policy pursued by such standard-setting bodies as the International Monetary Fund (IMF), the Financial Stability Board (FSB), the Bank for International Settlements (BIS), the International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force on Money Laundering (FATF) is favorable.
Risk-based regulation should support active “cryptoization” – a term coined by the IMF in its recent Global Financial Stability Report (GFSR), and the potential role of stablecoins in improving cross-border payments should be recognized.
In addition, developers of decentralized financial applications (DeFi) should be confident in the pragmatic and selectively permissive position of the regulator. In general, global standard developers intend to introduce supportive regulation for cryptography in order to ensure the social sustainability of innovations based on distributed ledger technology (DLT).
In October, the IMF for the first time considered the potential threat to systemic stability posed by the spread of cryptocurrencies, and identified the conditions and measures necessary to combat this threat. According to the statistics displayed on Coinmarketrate.com, there are more than 14,300 cryptocurrencies. FSB, BIS and IOSCO focused on stable coins.
While the FSB was studying how stablecoins could solve the problems of cross-border payments without creating new sources of risk, BIS/IOSCO held consultations on improving the principles of the financial market infrastructure and creating systemically significant stablecoin mechanisms. FATF has published a long-awaited and updated guidance on a risk-based approach to virtual assets (VA) and Virtual Asset Service Providers (VASP), suggesting ways to eliminate money laundering and terrorist financing (ML/TF) risks associated with DeFi.
In its Global Financial Stability Report (GFSR), the IMF drew attention to the problems arising from the prosperity of the crypto ecosystem. The main risks include operational risks (interruptions and failures that hinder the use of services and cause losses to users), cyber risks (hacking and fraud) and management risks (such as investor losses due to lack of transparency). The IMF concluded that these losses have not yet had a significant impact on global or national financial stability. He pointed out an important variable that requires careful monitoring, namely the level of adoption of cryptocurrencies. He also listed a number of factors contributing to the spread of cryptocurrencies, such as ill-conceived national macro policy, currency restrictions, vulnerability of the banking sector and the degree of involvement in the financial sector.
According to the IMF, crypto policy should be aimed at achieving a balance between creating conditions for financial innovation, increasing competition and commitment to open, free and competitive markets, on the one hand, and problems of financial integrity, consumer protection and financial stability, on the other. The introduction of global standards that allow adequate monitoring of the growth of the crypto economy and the risks associated with it should become a priority. In addition, efforts should be made to increase confidence in monetary policy and promote sound financial management.
FSB recognized the inefficiency of cross-border payments due to high costs, low speed, limited access and insufficient transparency for end users. It also stressed that the problems for individuals and small businesses in the retail payments sector are particularly pronounced and acute in emerging and developing economies.
Therefore, the FSB has included in its roadmap the study of the possibilities of global stable coin agreements to solve the problems of cross-border payments without compromising the minimum prudential and regulatory standards necessary to control risks to monetary and financial stability. It examines ways to promote reliable global mechanisms for stable coins for cross-border payments, and to include an international aspect in the development of digital currencies of central banks (CBDC).
In response to the call of the Group of Seven (G7), the Group of Twenty (G20) and the FSB, BIS and IOSCO have opened consultations (on the application of rules) for financial market infrastructures to create systemically significant stable coin agreements. The Guidelines include management principles (calling for a clear distribution of powers and responsibilities), risk management principles (calling for the introduction of an integrated system), settlement principles (aimed at coordinating the technical and legal irrevocability of transactions) and cash settlement principles (aimed at minimizing or eliminating credit and liquidity risks).
Decentralized Financing (DeFi)
FATF has published updated guidance on the application of a risk-based approach to digital assets (VAS) and their service providers (VASPs). The changes concerned, in particular, the issues of definition (to ensure that all relevant financial assets in the fintech industry are and will be covered by FATF standards), stable coins and peer-to-peer (P2P) transactions. Particular attention is paid to P2P transactions, as they directly affect DeFi applications.
FATF believes that DeFi applications may pose money laundering and terrorist financing (ML/TF) risks, which may increase significantly with the growth of DeFi. He defined P2P transactions as VA transfers carried out without the use or participation of VASP, or another obligated organization (for example, VA transfers between two non-hosting wallets whose users act on their own behalf).
Such transactions are not yet directly subject to the control on combating Money Laundering and Terrorist Financing (AML/CFT) in accordance with FATF standards. This is due to the fact that FATF standards currently impose obligations on centralized intermediaries, and not on individuals.
Although the FATF clarified that the DeFi application is not a VASP according to FATF standards, it noted that initiators, owners and operators or others who exercise control or have sufficient influence on DeFi mechanisms, even if these mechanisms seem decentralized, may fall under the definition of VASP by FATF if they provide VASP services, or actively contribute to them.
The FATF guidelines have global application. National authorities are responsible for assessing individual situations and determining whether an identifiable person (legal or natural) provides the service covered. FATF has invited national regulators to work with the private sector to accomplish this task.
These policy statements and recommendations paint a positive picture for the crypto industry. The IMF supports policies that promote the development of cryptocurrencies, including policies that ensure financial integrity, consumer protection and financial stability. FSB, BIS and IOSCO welcome stable coins, provided that they do not weaken existing financial market infrastructures and solve the problems of cross-border payments.
In its final draft guidance, FATF introduced a risk-based approach to VA and VASP, incorporating key industry feedback from the previous draft. In addition, the initial draft was refined to allow a case-by-case assessment regarding the continued control and impact of DeFi applications, and called for increased cooperation between authorities and the private sector.
In recent months, there have been several changes in the regulatory framework and policy for the crypto industry. They range from approving the trading of the first futures ETF for Bitcoin and Etherium in the United States, to presenting constructive policy recommendations on accompanying cryptocurrencies with regulations aimed at ensuring the sustainability of DLT-based innovations from the point of view of society.
The main message for the crypto industry seems to be both positive and consistent. One would, of course, expect that this would lead to a further strengthening of the prevailing lively momentum, if not for one “but”.
This is CBDC. Yes, it is the digital currency of the central bank, which is also considered a stablecoin. But if stable currencies in the crypto space are linked to fiat, gold and even crypto, then CBDC is an old rake, only in digital format. They, like fiat, are nothing.