Key Insights:

• The FSB highlighted crypto market turmoil, volatility, and structural vulnerabilities.

• The G20 financial regulator is particularly concerned with unregulated stablecoins.

• Regulatory recommendations will be proposed to G20 members by October.

On July 11, the Financial Stability Board (FSB) made a statement on the international regulation and supervision of crypto asset activities.

The regulator highlighted the recent market turmoil, intrinsic volatility, and structural vulnerabilities as an impetus to push through a framework. It also acknowledged that cryptocurrencies had an “increasing interconnectedness with the traditional financial system.”

The FSB is a body of regulators, treasury officials, and central bankers from G20 countries.

It added that it is working to ensure that “crypto-assets are subject to robust regulation and supervision.” The regulatory body will report to the G20 finance ministers and central bank governors in October.

Cleaning up Crypto

The move comes in the wake of several big meltdowns in what has been dubbed a crypto contagion. Following the collapse of the Terra ecosystem, several high-profile crypto lending companies, including Celsius, Voyager Digital, Three Arrows Capital, and BlockFi, have all faced their own liquidity issues. However, the FSB did not name them directly.

The FSB published a risk assessment on cryptocurrencies in February, outlining its concerns over the rapid growth of the asset class.

It stated that a practical regulatory framework must ensure that “crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes.” This implies that it will regulate crypto exchanges, brokers, and issuers similarly to banks. It could also attempt to shoehorn crypto into existing regulations G20 members have for traditional finance.

However, it did add that the “novel features” of crypto assets will be taken into account to harness the potential benefits of their underlying technology.

Stablecoins were specifically mentioned with the FSB stating that it would collaborate with the Financial Action Task Force (FATF) to regulate and supervise “unbacked” crypto assets and stablecoins. It said that stablecoins pose significant financial risks if they remain unregulated, adding, “such a stablecoin needs to be held to high regulatory and transparency standards, maintain at all times the reserves that preserve stability of value and meet relevant international standards.”

The FSB would also study the “financial stability” of decentralized finance (DeFi).