Global Watchdogs Getting More Active

In advance of the meetings of the G20 finance ministers and central bank governors in Japan this past weekend (June 8–9), the Financial Stability Board (FSB) prepared two reports on crypto’s impact on global financial stability, and the financial stability, regulatory and governance implications of decentralized financial technologies. While the FSB maintained its position that digital assets do not currently represent a risk to global stability, it urged regulators to more proactively assess potential risks, stating that “risks associated with crypto-asset markets and the level of significance of potential regulatory gaps will keep evolving” given the pace of innovation and change. The FSB summarizes the work of a number of international bodies looking at investor protection, market integrity, anti-money laundering, bank exposures, and financial stability monitoring. However, the FSB notes that in trying to clarify how established regulatory frameworks apply to digital assets, these groups are identifying potential gaps given the absence of international crypto standards.

While the primary focus of this weekend’s meetings was U.S.-China trade tensions, the G20 communique published on Sunday, which will help shape the agenda for the full G20 summit later this month, directly addressed crypto-assets, stating:

“Technological innovations, including those underlying crypto-assets, can deliver significant benefits to the financial system and the broader economy. While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering (AML) and countering the financing of terrorism (CFT).”

We expect digital assets to remain a key part of the G20’s and FSB’s agendas for the foreseeable future, and also note the growing focus of other bodies such as the International Organization of Securities Commissions (IOSCO), which identified crypto-assets as one of its top priorities and subsequently published a consultative paper on crypto trading platforms that identifies key considerations for national regulators: customer access; safeguarding of customer assets; conflicts of interest; operational considerations; market integrity; price discovery; and technology.

The growing interest in and action by international organizations may keep national-level regulators wary of adopting crypto into their respective economic policies, but may also have the effect of spurring action in countries that have not yet defined their digital asset strategies or — in the case of the U.S. — have taken a confusing, inconsistent, or reactive approach. However, given the tenor of the communications from the FSB, and in light of the forthcoming FATF guidance on AML/CFT that we addressed last month, we are not optimistic that the thrust behind these efforts will encourage crypto-friendly regulatory advancement.

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