On 16 July 2018, the Financial Stability Board (FSB) published a report to the G20 on its work with the Committee on Payments and Market Infrastructures (CPMI) to develop a framework and identify metrics for the monitoring of financial stability risks posed by crypto-assets. The report also provided a helpful overview of the work being done by the other standard-setting bodies (SSBs), including the International Organisation of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS) on crypto-assets.
We set out below a summary of the key points covered in the report.
IOSCO’s work is focused on addressing the regulatory risks of initial coin offerings and crypto-asset platforms.
In respect of crypto-asset platforms, IOSCO has identified potential regulatory concerns, such as consumer and investor protection, market integrity and money laundering/terrorism financing risk.
Part of the issue is in determining which (if any) financial regulations apply to a crypto-platform, and, in the case of “crypto-exchanges”, whether or not they might be classified as an exchange or an intermediary and, if so, whether or not they comply with laws applicable to exchanges or intermediaries. There is also concern regarding non-intermediated access to crypto-asset platforms, which may present issues under traditional regulatory models that rely on market access through regulated intermediaries to support investor protection and regulatory objectives (an issue similar to other platforms, such as crowdfunding platforms).
IOSCO also recognises that since certain crypto-assets offered on crypto-platforms may not be subject to financial regulation, the regulation of these platforms may require coordination with other sectoral regulators. For example, where crypto-assets (which are not securities) are traded on a crypto-platform solely for payment purpose, that platform might be better viewed as part of a payments infrastructure or a type of spot market. On the other hand, other crypto-asset platforms might be better viewed as falling within the remit of securities regulators.
IOSCO intends to work with other SSBs to explore these issues.
IOSCO’s Committee on Secondary Markets is also reviewing other internet-based platforms, including crypto-asset platforms, and may consider whether IOSCO’s Principles for Secondary and Other Markets would also apply to crypto-asset platforms. Key issues being considered by the committee include transparency, custody and settlement, trading, and cybersecurity and systems integrity.
The BCBS is monitoring crypto-asset developments from the perspective of strengthening the regulation, supervision and practices of banks, with the objective of enhancing financial stability. In this regard, the BCBS’ three current initiatives are to:
- quantify the materiality of banks’ direct and indirect exposures to crypto-assets;
- clarify the prudential treatment of banks’ exposure to crypto-assets; and
- monitor developments in crypto-assets and fintech to assess their implications for banks and supervisory bodies.
To do this, the BCBS intends to conduct an initial stocktake on banks’ direct and indirect exposures to crypto-assets and banks’ capital and liquidity treatment of such exposures, to be followed by a structured data collection exercise as part of the BCBS’ Basel III monitoring exercise.
In the first quarter of 2018, the FSB conducted an initial assessment of the financial stability risks posed by the growth of crypto-assets and found that crypto-assets did not pose a material risk to global financial stability at the time.
This finding was based on the fact that the value of crypto-assets remained small relative to the financial system, and that the linkage of crypto-assets to the financial system is limited because crypto-assets are not substitutes for currency and therefore have limited use for real economy and financial transactions.
However, in light of the rapid pace of developments in the crypto-asset market, the FSB and the CPMI were requested to collaborate to develop a framework to support the monitoring and timely identification of emerging financial stability risks posed by crypto-assets, with a focus on identifying potential metrics.
The monitoring framework developed by the FSB focuses on assessing the primary risks within the crypto-asset market, as well as the potential transmission channels from the crypto-asset market to financial stability risks (such as financial institution exposures to crypto-assets).
The potential transmission channels, and the proposed metrics to monitor such channels, are outlined in the annex to the report. The FSB believes that the proposed metrics provide a useful picture of the crypto-asset market and the financial stability risks it presents. The FSB intends to continue to improve the metrics by addressing data reliability and data completeness issues, and to assess whether new metrics might be added later.
The CPMI monitors the development of digital currencies and distributed ledger technology from the perspective of the safety and efficiency of payment, clearing, settlement and related arrangements. Based on its recent examination with IOSCO, the CPMI has not identified critical issues or gaps for distributed ledged technology-based financial market infrastructures at this stage.
The CPMI’s future work includes a number of work streams, including:
- advising central banks to proceed with caution on central bank digital currency (CBDC);
- monitoring the use of CBDCs and private digital tokens for payments (including the development of “second generation” cryptocurrencies, which may be digital tokens with improved technology and/or underlying assets); and
- the analysis of safety and efficiency considerations for wholesale digital currencies (both public and privately issued variants).
The CPMI also identified possible areas for further study, including legal issues around the holding and transferring digital currencies, and the cross-border implications of CBDCs.
Although the report does not set out specific principles or guidance for authorities to consider in regulating crypto-assets or crypto-asset platforms, it highlights the heightened monitoring and scrutiny of crypto-assets and the various work streams of the SSBs in this respect.
The work being undertaken by the SSBs will potentially lead to the introduction of substantive recommendations for the regulation of crypto-assets and crypto-asset platforms in the future, and developments in this area should be closely followed by participants in the crypto-asset ecosystem.