The Financial Stability Board’s (FSB) proposed framework for the international regulation of crypto assets is a welcome step forward in the task of taming the ‘Wild West of crypto finance’.
But implementing this sort of legislation must be done swiftly and globally if it is to succeed.
Regulating the sprawling crypto market will be no small feat. Although its total value has slumped from a high of almost $3tr last year to $920bn on Tuesday, or just over three times the outstanding size of the ECB’s third covered bond purchase programme, the tempramental secotr is still firmly on the radar of regulators and governing bodies.
The FSB's framework proposal, for example, published on Tuesday, is based on the idea of “same activity, same risk, same regulation”. In lamens terms that means if a crypto asset has the same function as a traditional instrument or piece of market infrastructure, then it should be treated in the same way.
Take stablecoins for example. The proposal stipulates that central banks should regulate stablecoins in the same way as they would transaction settlements, while the trading of crypto assets like securities should come with all the investor protections that exist in the traditional financial markets.
Any successful crypto legislation will have to straddle international jurisdictions, much like the Basel Accords that regulate the banking sector. The Basel Committee on Banking Supervision has members from 28 different countries, with 100 further non-member states adopting some part of the regulation.
But it takes time to create a regulatory regime of this size. The final stages are not set to be implemented until early next year, almost 15 years after the financial crisis that spawned them. And even then, they will be phased in over the course of the next five years.
And like the Basel Accords, implementing some form of consistent global crypto regulation is a mammoth task. But unlike Basel, the global markets cannot wait decades for a set of implemented crypto rules.
The crypto market is quickly and constantly shifting. It took algorithm-backed Terra three years to grow to become the third largest stablecoin by market cap, and only a handful of weeks to collapse entirely.
Adequate crypto regulation may have been able to prevent such a sudden demise. But, it didn't exist.
Of course, individual jurisdictions are pursuing their own legislation. For instance, the EU has its Markets in Crypto Assets bill — which passed the committee stage on Monday — while the UK is working on its new Financial Services and Markets legislation.
The EU’s largest states and the UK are members of the G-20 and thus the FSB, so it is likely that they will also encorporate what it has to say when it comes up with its own regime.
However, much of the crypto market occurs outside the remit of the FSB. Binance, the largest cryptoexchange, is based in the Cayman Islands, for instance. Meanwhile in January, Kazakhstan accounted for 24.8% of global bitcoin mining, according to the Cambridge Bitcoin Electricity Consumption Index.
The FSB noted that “regulatory fragmentation and arbitrage” could occur without cross-border cooperation. For example, Binance has proven itself adept in staying one step ahead of the regulators in the past, moving from China to Japan and abroad again to avoid a crypto clampdown.
Crypto assets are firmly in the mainstream, with beloved football institutions and celebrities promoting coins and exchanges to mixed results. They show no signs of going anywhere — despite a drastic drop in market cap — and the regulators are more than aware of that.
Regulators, like the FSB, are taking the right steps to subdue the unruly crypto market, but they must do so on a huge scale — and fast. The crypto cat’s out the bag — now let’s hurry up and put a collar on it. Quickly.