March 27, 2024
Policy & Regulation

FSB Calls for Enhanced Global Digital Asset Regulation to Safeguard User Assets

The Proposals Aim to Prevent Crypto-Related Turmoil and Strengthen Stablecoin Regulations.

The Financial Stability Board (FSB) has emphasized the urgent need for improved global regulation of digital assets, with a specific focus on safeguarding user assets. As a prominent international financial body responsible for setting standards, the FSB has unveiled a set of recommendations aimed at mitigating the market turbulence witnessed last year.

“Same Activity, Same Risk, Same Regulation”

Underlying the FSB’s call for a stricter regulatory framework is the guiding principle of “same activity, same risk, same regulation.” The board believes consistent regulations across jurisdictions are essential to address the challenges of virtual assets and stablecoins.

Commingling of User Funds: A Key Factor in Crypto Entity Collapses

One critical aspect identified by the FSB is the commingling of user funds, which has played a significant role in the collapse of various crypto-related entities, including exchanges and banks. Notable examples cited by the board include the downfall of FTX in November and Terra in April 2022. Additionally, the brief de-pegging incident of USD Circle (USDC) further highlights the need to strengthen general stablecoin rules to prevent future disruptions.

Distinguishing User Funds and Strengthening Cross-Border Cooperation

To avoid conflicts of interest and enhance regulatory oversight, the FSB emphasizes the necessity of distinguishing user funds from a platform’s assets. This clear demarcation will facilitate effective audits by regulators and ensure transparency across different jurisdictions. The FSB outlines three key areas for improvement:

  1. Ensuring adequate safeguarding of client assets
  2. Addressing risks associated with conflicts of interest
  3. Strengthening cross-border cooperation

Exemption for Central Bank Digital Currencies (CBDCs)

The FSB has exempted Central Bank Digital Currencies (CBDCs) from its recommendations due to their significantly lower risk profile compared to other crypto assets. This exemption acknowledges the unique characteristics and regulatory frameworks associated with CBDCs.

De-Pegging: The Stablecoin Headache

The FSB urges regulators to elevate stablecoin regulations, particularly for global stablecoins operating across multiple jurisdictions. The board emphasizes that stablecoin issuers must obtain permits in their primary jurisdiction to ensure adherence to best practices. Furthermore, issuers should establish a “governance group” comprising identifiable legal entities or individuals to enhance accountability.

Maintaining Stability: Reserve Assets and Regulatory Compliance

To prevent stablecoins from losing their pegs, the FSB proposes that issuers either hold 1:1 reserve assets or comply with all the requirements applicable to commercial banks. This measure aims to bolster the stability and reliability of stablecoins. The FSB also emphasizes the importance of full compliance by crypto firms in terms of disclosure and urges regulators to maintain tight scrutiny.

Promoting Transparency and Regulatory Oversight

In line with its recommendations, the FSB highlights the necessity for authorities to have access to relevant data to fulfill their regulatory, supervisory, and oversight mandates effectively. This emphasis on transparency and information sharing seeks to strengthen the regulatory framework and ensure robust oversight of the digital asset ecosystem.

Photo by Pixabay

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