FT: Global financial watchdogs to roll out international crypto regulations in 2023

Global financial watchdogs are set to lay out a firm framework to regulate the crypto industry in early 2023 and implement it quickly. The secretary-general of the Financial Stability Board (FSB), Dietrich Domanski, told The FT there is ‘strong agreement’ on a framework for digital asset rules.

While the EU, the UAE, and other countries have created regional rules, global policymakers have been criticized for a regulatory vacuum that enabled companies like Terraform Labs and FTX to violate borders and grow exponentially with minimal oversight before their multibillion-dollar crashes.

The Financial Stability Board (FSB) intends to set out a timeline for global regulators in the coming months to implement its first recommendations on global crypto regulation, detailing areas for policymakers for “more clarity” before making rules. Then, global rules agreed upon at the FSB will be put into law by national regulators and governments.

“One objective of this work plan is precisely to counter a perception that all this (work on cryptocurrency) is disperse and slow and is not focused on a single common goal,” Domanski told in an interview with the Financial Times.

The outgoing secretary-general of the FSB claimed there was “strong agreement” among the Financial Stability Board’s members about the strategy which “shows clearly what the way forward for crypto regulation looks like.”

“Many crypto market participants argue that authorities are hostile to innovation. I would say so far, authorities have been fairly accommodating … recent events have reinforced the recognition that it is indeed urgent to address risks,” he added.

The aim is to create the framework where crypto service providers “would be held to the same standards as banks … if they provide the same service that banks provide”, Domanski noted. He also added that such rules would prevent calamities like FTX and Terraform since neither would have met “the criteria for sound governance” that the rules would demand.

EU’s crypto rules, agreed upon earlier in July, will not come into effect until 2024. Global rules typically need a longer time to lead in. “I don’t think that we would be talking about a decade. I mean, that would be way too long. I think the work plan will reflect the urgency,” Domanski said of the likely timeframe for agreeing on final rules and countries implementing them.

According to Domanski, the additional areas for work include how to deal with firms where “there is a combination of different activities that are traditionally separate,” the need to “clarify governance arrangements and ensure transparency,” and how to “safeguard” client funds to avoid a destabilizing run on a cryptocurrency.

Previously, The Basel bank capital rules have been the FSB’s most impactful global policy work, forcing banks to raise tens of billions and implement far tighter risk management frameworks in the aftermath of the 2007-08 crash. That work was steered by a dedicated committee, known as the Basel Committee for Banking Supervision (BCBS). Domanski said he would not rule out a similar committee to drive forward crypto regulation “at some point” but stressed that crypto was a key priority at FSB meetings, alongside climate and non-bank financial regulation.

Domanski defended the FSB’s record, noting that when experts first began looking at the market in 2017, its evolution was unclear and there were legitimate questions about what there was to regulate and whether the approach should be tighter regulation or “let it burn.”

He said it was necessary to understand the crypto markets better before setting rules. “All of those who say, you should move faster, you should do more, I would invite them to follow a global co-operative process … and then tell me where there are spots that we could have moved faster,” Domanski said.

Meanwhile, banking heavyweights opposed strict Basel rules for holding crypto capital last year. A forum of the largest US and European banks, including JPMorgan Chase and Deutsche Bank, has urged modifications to the rules proposed by the world’s central banks and regulators for capital requirements on Bitcoin exposure.

Banking bosses from the largest financial institutions in the US and Europe have voiced their opposition to the cryptocurrency mandates handed down last June by the BCBS, which proposes strict capital requirements for every dollar of Bitcoin owned.

The Global Financial Markets Association (GFMA), a forum for banks that includes JPMorgan and Deutsche Bank, together with five other industry associations, published a letter that pushed against the new regulation. The letter was also signed by the Financial Services Forum, the Futures Industry Association, the Institute of International Finance, the International Swaps and Derivatives Association, and the Chamber of Digital Commerce, as well as the GFMA.