Thursday, 11 November, 2021
The Digital Regulator
Promotion of sustainable ‘cryptoization’ by global standard setters
October 2021 witnessed several fundamental policy pronouncements on cryptofinance by global standard setters. These aimed to set the policy direction for cryptocurrencies (or ‘crypto’) in the foreseeable future. The emerging global policy message from standard setters such as the International Monetary Fund (IMF), Financial Stability Board (FSB), Bank for International Settlements (BIS), International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF) is supportive. Risk-based regulations should support the buoyant ‘cryptoization’ (a term introduced by the IMF in its latest Global Financial Stability Report (GFSR)) of economies, and the potential role of stablecoins in enhancing cross-border payments should be recognised. Furthermore, developers of decentralised finance (DeFi) applications should be assured of a pragmatic and selectively permissive regulatory stance. On balance, global standard setters intend to introduce supportive regulation for cryptoization to ensure the societal sustainability of distributed ledger technology (DLT)-based innovation.
Focus on cryptoization, stablecoins, and DeFi: An assessment
The IMF, for the first time in October, addressed the potential threat of increased crypto adoption to systemic stability and stated the conditions and policies appropriate to handle such threat. The FSB, BIS, and IOSCO focused on stablecoins. While the FSB examined how stablecoins could address cross-border payment challenges without introducing new sources of risk, BIS/IOSCO undertook consulting to improve the principles of financial market infrastructure and accommodate systemically important stablecoin arrangements. The FATF issued long-awaited and updated guidance notes for a risk-based approach to virtual assets (VA) and virtual asset service providers (VASP), proposing ways to address the money laundering and terrorist financing (ML/TF) risks posed by DeFi.
These policy pronouncements and recommendations paint a positive picture for cryptofinance. The IMF encourages policies that enable cryptoization, including those that ensure financial integrity, consumer protection, and financial stability. The FSB, BIS, and IOSCO welcome stablecoins, provided they do not weaken the current financial market infrastructures, and address cross-border payment challenges. In its final draft guidance, the FATF presented a risk-based approach to VA and VASP by incorporating the gist of industry feedback from an earlier draft4. Furthermore, it refined the original draft, allowing for case-by-case judgment regarding the maintenance of control and influence of DeFi applications, and called for enhanced cooperation between the officials and private sector.
Other Noteworthy Developments
The US SEC approved the first bitcoin futures ETF and an ETF based on bitcoin active companies.
News regarding progress in the CBDC space included developments from Hong Kong, France, Georgia, Ghana, and Nigeria.
Material regulatory or governmental developments concerning cryptofinance were presented in several jurisdictions including Australia, Malta, Guernsey, Sri Lanka, and Russia.
The last few weeks presented several positive regulatory and policy developments for the cryptofinance industry. These range from approval for trading the first bitcoin futures ETF in the US, to presenting constructive policy recommendations to accompany cryptoization with regulations that aim to ensure the sustainability of DLT-based innovations from a societal point of view. The underlying message for cryptofinance is positive and consistent. We expect that this will further consolidate the prevalent buoyant momentum.
1https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financial-stability-report-october-2021, page 53 ↵
2https://www.fatf-gafi.org/media/fatf/documents/recommendations/Updated-Guidance-VA-VASP.pdf, page 18 ↵
3https://www.fatf-gafi.org/media/fatf/documents/recommendations/Updated-Guidance-VA-VASP.pdf, page 27 ↵
4SEBA Bank commented in May 2021: https://www.seba.swiss/research/fatf-and-defi-further-thinking-is-required/ ↵
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