Author | Colin Wu
Recently, the People's Bank of China released the "China Financial Stability Report (2024)", in which several paragraphs mentioned the global cryptocurrency regulatory trends in great detail, and emphasized the progress of cryptocurrency compliance in Hong Kong.
Page 47 (Non-bank institutions and other sections)
Regulatory authorities in various countries continue to strengthen the supervision of crypto assets. After the crypto asset market experienced a series of risk events in 2022, prices and trading volumes rebounded significantly in 2023. At the end of the year, the global market value of crypto assets reached 1.55 trillion US dollars, a year-on-year increase of 10.71%. In view of the possible spillover risks of crypto assets to the stability of the financial system, regulatory authorities in various countries continue to increase their supervision of crypto assets. At present, 51 countries and regions in the world have issued prohibitions on crypto assets, and some economies have adjusted their original laws or re-legislated regulations.
Based on existing regulations, the United States regulates the behavior of issuers of crypto assets that violate the Securities Act. The U.S. Securities and Exchange Commission (SEC) rejected more than 20 applications for spot Bitcoin ETFs from 2018 to 2023. After approving the listing of the Bitcoin spot ETF in January 2024, the chairman of the SEC said that this does not mean that the SEC has approved or recognized Bitcoin products, and investors should still be cautious about the risks associated with Bitcoin and products whose value is linked to crypto assets;
The European Union approved the Crypto-Asset Market Regulation Act, establishing the world's first complete and clear regulatory framework for virtual assets. The Act is scheduled to be formally implemented by the end of 2024.
The UK has accelerated the pace of virtual asset legislation and promulgated the Financial Services and Markets Act, which includes crypto assets in the scope of regulation;
Singapore has issued the Stablecoin Regulatory Framework, which clarifies the scope of regulated stablecoins and the conditions for issuers;
Japan has enacted the Funds Settlement Act, which limits issuers of stablecoins to institutions such as licensed banks, registered transfer agents, and trust companies.
Hong Kong, China is actively exploring the management of crypto asset licenses. Hong Kong, China divides virtual assets into two categories for supervision, namely, securitized financial assets and non-securitized financial assets, and implements a special "dual license" system for operators of virtual asset trading platforms, that is, "security tokens" are subject to the supervision and licensing system of the Securities and Futures Ordinance, and "non-security tokens" are subject to the supervision and licensing system of the Anti-Money Laundering Ordinance. Institutions engaged in virtual asset business must apply for registration licenses from relevant regulatory authorities before they can operate. At the same time, large financial institutions such as HSBC and Standard Chartered Bank are required to include crypto asset exchanges in the scope of daily customer supervision.
Page 67 Macroprudential Management Section
In recent years, crypto asset activities have become increasingly complex and the market has been volatile. Overall, there is limited correlation between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure, but as crypto assets are increasingly used in payment and retail investment, they may pose risks in some economies.
The FSB and relevant standard-setting bodies have jointly developed a global regulatory framework for crypto assets, which guides regulators to address financial stability risks related to crypto assets based on the principle of "same activities, same risks, same supervision."
The IMF and FSB have developed a regulatory policy roadmap to identify and address macroeconomic and financial stability risks of crypto assets. The roadmap organizes work related to the implementation of the regulatory policy framework for crypto assets, aiming to promote global information sharing and cooperation and fill the data gaps needed for the rapidly changing crypto asset ecosystem.
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Financial Stability Board releases international regulatory framework for crypto assets
In July 2023, the FSB released the International Regulatory Framework for Crypto Assets, which put forward high-level regulatory recommendations for crypto assets and "global stablecoins" a, aiming to enhance the global consistency of regulatory approaches in the crypto asset industry, reduce regulatory loopholes, prevent regulatory arbitrage, and effectively prevent financial risks.
I. Two general principles of regulatory recommendations
The first is the principle of “same business, same risk, same regulation”. If crypto assets and “global stablecoin” businesses have the same economic functions as traditional financial businesses and are accompanied by the same types of financial risks, they should comply with the same regulatory requirements.
The second is the principle of flexibility. Regulatory authorities in various economies can apply existing laws and regulations to the crypto asset industry, or they can formulate new laws and regulations to implement relevant regulatory recommendations.
The third is the principle of technological neutrality. Regulatory authorities in various economies should regulate crypto asset businesses based on their economic functions and risk characteristics, rather than their underlying technologies.
II. Contents of regulatory recommendations
The two regulatory proposals put forward specific requirements for regulatory authorities, crypto-asset issuers and service providersb.
High-Level Recommendations on Monitoring, Supervision and Regulation of Crypto-Asset Businesses and Markets (CA Recommendations)
The CA recommendations contain a total of 9 high-level recommendations.
1. Regulatory powers and tools. Regulatory authorities should have appropriate regulatory powers, tools and sufficient resources to regulate crypto assets and be able to effectively enforce relevant laws and regulations.
2. Comprehensive supervision. The regulatory authorities should implement comprehensive supervision commensurate with the risks of crypto assets in accordance with the principle of "same business, same risk, same supervision". For example, formulate regulatory policies that match their risks, scale, complexity and systemic importance; evaluate whether the current regulatory measures can cope with the financial stability risks caused by crypto assets, and expand or adjust the scope of supervision as appropriate; unify the regulatory standards of the crypto asset market and the traditional financial market, and fully protect the interests of all relevant parties.
3. Cross-border cooperation, coordination and information sharing. Given the cross-border nature of crypto assets, regulatory authorities should fully consider their spillover risks, promote efficient communication, information sharing and consultation at home and abroad, and promote regulatory consistency.
4. Governance framework. Cryptoasset issuers and service providers should develop and disclose a comprehensive governance framework that is commensurate with their risk, scale, complexity, and systemic importance and the financial stability risks they may pose, with clear accountability mechanisms and procedures for identifying, addressing, and managing conflicts of interest.
5. Risk management. Crypto asset issuers and service providers should establish an effective risk management framework: be able to identify, measure, assess, monitor, report and manage all major risks; have a reputable management team that can effectively supervise compliance issues; establish emergency plans and business continuity plans (BCPs), comply with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protect customer assets and reduce the risk of customer assets being damaged, misused or unable to be redeemed on time.
6. Data management. Cryptoasset issuers and service providers should establish a comprehensive data management system that: ensures the integrity and security of data and complies with relevant laws and regulations on data security; promptly corrects erroneous data to ensure reliable data quality; is able to report relevant data information comprehensively, promptly, accurately and continuously; supports cross-economy data sharing and improves the public’s understanding of cryptoassets.
7. Information disclosure. Crypto asset issuers and service providers should fully disclose information. The disclosed information includes necessary information such as the risk characteristics of operations, transactions, management and products; the terms of the custody relationship, safeguards for customer assets and the risk of custodian bankruptcy; and major technical risks, such as cybersecurity risks and environmental climate risks.
8. Address financial stability risks arising from the links between the cryptoasset ecosystem and the financial system. Regulators should effectively monitor the links within the cryptoasset ecosystem and between the cryptoasset ecosystem and other financial systems to identify and resolve potential financial stability risks.
9. Comprehensively supervise multi-functional crypto-asset service providers. Regulatory authorities should require service providers to build an organizational management system that is consistent with their overall strategy and risk profile; take effective measures in accordance with the law when service providers fail to comply with existing regulations or have serious conflicts of interest; closely guard against concentration risks and related-party transaction risks, and formulate additional prudential supervision requirements when necessary; require cross-border service providers to share information to prevent risks from spreading overseas.
High-Level Recommendations on the Regulation of Global Stablecoins (GSC Recommendations)
The GSC recommendations include a total of 10 high-level recommendations. In addition to the seven requirements similar to the CA recommendations, such as regulatory powers, governance framework, and risk management, three separate recommendations were also made.
1. Recovery and disposal plan. Global stablecoins should develop appropriate recovery and disposal plans to support orderly liquidation or disposal within the legal framework and ensure that key functions and activities can be restored or continue to operate.
2. Redemption rights, stability and prudential requirements. Users should be provided with strong legal claims or protections against the issuer or underlying reserve assets of the "global stablecoin", and timely redemption should be guaranteed: the redemption procedures, redemption fees and claims should be explained to users, including how to ensure smooth redemption under stress scenarios; there should be reserve assets equal to the amount of stablecoins in circulation, and the reserve assets should be composed of high-quality and highly liquid assets that are uncollateralized, easy to cash and not impaired. When the issuer goes bankrupt, the ownership of the reserve assets should be protected; comply with prudential requirements (including capital and liquidity requirements), and have sufficient liquidity to cope with capital outflows.
3. Regulatory requirements before operation. “Global stablecoins” should comply with the market access requirements (such as licenses or registrations) of the economies in which they operate before operation, and build the necessary products and systems to adapt to new regulatory requirements.
III. Work Progress and Future Prospects
Follow up on the implementation of member policies. Track the main market and regulatory developments since the release of regulatory recommendations, and summarize the progress, experience, practices, problems and challenges faced in the implementation of high-level regulatory recommendations on crypto assets and "global stablecoins" by FSB members.
Evaluate the effectiveness of the implementation of regulatory recommendations. By the end of 2025, work with relevant international organizations to evaluate the implementation of regulatory recommendations by member economies, ensure that regulatory recommendations are fully and consistently implemented, and determine whether it is necessary to update the recommendations.
Continue to research and improve regulatory policies. Study the potential financial risks of multi-functional crypto asset service providers and assess whether additional regulatory policies are needed based on potential impacts.
Expand the scope of implementation and monitoring. Take measures with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations in non-FSB members and reduce the risk of regulatory arbitrage. Invite non-FSB member economies with significant cross-border crypto-asset businesses to join the relevant FSB working groups to expand the scope of cross-border monitoring of crypto-assets.
