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Crypto Companies Need Backing Capital Like Banks, Says Global Regulator

2 mins
Updated by Geraint Price
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In Brief

  • The Financial Stability Board (FSB) has issued a proposal for global cryptocurrency regulation, offering nine recommendations for countries to consider.
  • The global coordinator for financial regulation believes that crypto companies should be required to hold more capital against their assets, similarly to banks.
  • The proposal is out for public consultation until Dec. 15.
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The global coordinator for financial regulation has put forward a proposal for cryptocurrency regulation, which it hopes countries will enact before the end of the crypto winter.

The Financial Stability Board (FSB), which monitors and makes recommendations about the global financial system for the Group of 20 Economies (G20), offered nine recommendations for these countries to apply. 

Cryptocurrencies currently remain largely unregulated throughout the countries of the world, with most firms only required to comply with rules against money laundering and terrorist financing. 

Yet, the shocks that have caused crypto markets to fall from $3 trillion in market capitalization at their peak in Nov. last year to currently under $1 trillion have led the FSB to believe that crypto firms should be required to hold greater amounts of capital, similarly to banks or other payment providers. 

“Several crypto-asset lenders failed during the recent market turmoil as a result of vulnerability to runs, thin capitalization, concentrated exposures to risky entities, and risky trading and business ventures,” the FSB said.

FSB recommendations for data and risk

In addition to this requirement, the FSB said crypto companies should have a framework for oversight that would manage risk and data at these firms, and include contingency plans for a smooth shutdown in case of any crises.

The FSB also updated its guidance on stablecoins, saying that most existing ones do not meet its standards. According to the regulatory facilitator, the collapse of the Terra stablecoin earlier this year highlighted the need for these assets to have robust collateral behind them. 

Consequently, the FSB also proposed that stablecoin issuers strengthen the governance surrounding their assets, provide effective stabilization mechanisms for them, as well as clarify how they might be redeemed.

Crypto risks will come “sooner rather than later”

According to FSB chair Klaas Knot, the drop in crypto asset prices over the past year confirmed the board’s perspective that the sector still lacks fundamental structural integrity. While currently not large enough to threaten overall financial stability, Knot said cryptocurrencies would require that regulatory framework in order to facilitate an appropriate recovery.  

“Concerns about the risks they pose to financial stability are therefore likely to come back to the fore sooner rather than later,” Knot said in a letter to G20 finance ministers. 

The proposals are out for public consultation until Dec. 15. On finalization next year, FSB members will be expected to swiftly implement these recommendations.

Meanwhile, the European Union has been careening forward with its Markets in Crypto Assets (MiCA) legislation, in addition to unveiling “embedded supervision” for decentralized finance projects.

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Nicholas Pongratz
Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.
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