While the European Union and others have created regional rules, global policymakers have been criticised for facilitating a regulatory vacuum that enabled companies like FTX to straddle borders and achieve massive scale with scant oversight before their multibillion-dollar combustion.
In coming months the FSB intends to set out a timeline for global regulators to implement its first recommendations on global crypto regulation, as well as detailing areas where policymakers could benefit from “more clarity” before making rules, following issues exposed by recent failures like FTX and cryptocurrency operator Terraform Labs, whose terraUSD stablecoin collapsed overnight. Global rules agreed at the FSB are then put into law by national politicians and regulators.
“One objective of this work plan is precisely to counter a perception that all this (work on cryptocurrency) is disperse and slow and is not focused on a single common goal,” Dietrich Domanski told the FT at his Basel office, the day before his five-year term ended. He will be replaced by John Schindler, a director at the Federal Reserve’s financial stability division.
Domanski said there was “strong agreement” among the Financial Stability Board’s membership about the strategy which “shows clearly what the way forward (for crypto) regulation looks like”, more than five years after the FSB began evaluating the sector’s risks.
“Many crypto market participants argue that authorities are hostile to innovation. I would say so far, authorities have been fairly accommodating . . . recent events have reinforced the recognition that it is indeed urgent to address risks,” he said.
The objective is to create a regime where crypto service providers “would be held to the same standards as banks . . . if they provide the same service that banks provide”, Domanski said, adding that such rules would prevent calamities like FTX and Terraform since neither would have met “the criteria for sound governance” that the rules would demand.
Europe’s crypto rules, agreed in July, will not come into effect until 2024. Global rules typically need a longer lead-in. “I don’t think that we would be talking about a decade. I mean, that would be way too long. I think the work plan will reflect the urgency,” Domanski said of the likely timeframe for agreeing final rules and countries implementing them.
The areas for additional work following a spate of crypto collapses include how to deal with firms where “there is a combination of different activities that are traditionally separate”, the need to “clarify governance arrangements and ensure transparency” and how to “safeguard” client funds to avoid a destabilising run on a cryptocurrency, Domanski said.
The Basel bank capital rules have been the FSB’s most impactful global policy work, forcing banks to raise tens of billions and implement far tighter risk management frameworks in the aftermath of the 2007-08 crash.
That work was steered by a dedicated committee, known as the Basel Committee for Banking Supervision. Domanski said he would not rule out a similar committee to drive forward crypto regulation “at some point” but stressed that crypto was a key priority at FSB meetings, alongside climate and non-bank financial regulation.
He defended the FSB’s record, stressing that when experts first began looking at the market in 2017, its evolution was unclear and there were legitimate questions about what there was to regulate and whether the approach should be tighter regulation or “let it burn”.
He said it was necessary to understand the crypto markets better before setting rules. “All of those who say, you should move faster, you should do more, I would invite them to follow a global co-operative process . . . and then tell me where there are spots that we could have moved faster,” he added.
