Financial Stability Board (“FSB”) Releases a Framework and Consultation for Crypto-asset Activities

11 November 2022

On 11 October 2022, the FSB issued a consultative report proposing recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-assets activities.

Crypto assets are still fast evolving over the years, regardless of their volatility. The need of a harmonized, effective, and comprehensive regularity framework is evidenced by the number of structural vulnerabilities in the market. These weaknesses are amplified by a flawed governance, inadequate consumer and investor protections, and poor risk management.

Below is a summary of the nine recommendations coming out of the FSB consultative report:

Authorities need powers, tools, resources to oversee crypto markets, issuers, and services providers
Authorities should apply “same activity, same risk, same regulation”
Authorities should cooperate and coordinate domestically as well as internationally to encourage consistency of regulatory and supervisory outcomes
Authorities should require that crypto-asset issuers and services providers have comprehensive governance frameworks
Authorities should require that crypto-asset service providers have effective risk management frameworks in place
Authorities should require that crypto-asset issuers and service providers need to have frameworks for data collection, storage, safeguarding and reporting
Authorities should require that crypto-asset issuers and service providers need to have appropriate risk, financial, and product disclosures
Authorities should identify and monitor interconnection and interdependency risks on financial stability between the crypto-asset ecosystem and the wider financial system
Authorities should ensure that crypto-asset service providers that combine multiple functions and activities are subject to appropriate regulation, supervision and oversight to mitigate individual and risks coming from combining activities

It is important to note that the FSB had previously issued, in October 2020, a report with a set of 10 high-level recommendations on the regulation, supervision, and oversight of so-called “global stablecoin” (“GSC”) arrangements (“High-level Recommendations”). The two groups of recommendations are interconnected, reflecting the similarities between stable coins and the wider crypto-asset ecosystem. The groups should provide a base for consistency and cooperation among authorities’ approaches to the regulation and supervision of crypto-asset activities across jurisdictions.

October 2020 GSC High-level Recommendations:

Authorities should have and must use the necessary or appropriate powers and tools, and adequate resources, to comprehensively regulate, supervise, and oversee a GSC arrangement and its associated functions and activities, and enforce relevant laws and regulations effectively.

FSB High-level recommendation 1	Authorities should have and must use the necessary or appropriate powers and tools, and adequate resources, to comprehensively regulate, supervise, and oversee a GSC arrangement and its associated functions and activities, and enforce relevant laws and regulations effectively.
FSB High-level recommendation 2	Authorities should apply comprehensive regulatory, supervisory and oversight requirements consistent with international standards to GSC arrangements on a functional basis and proportionate to their risks insofar as such requirements are consistent with their respective mandate.
FSB High-level recommendation 3	Authorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication, information sharing and consultation in order to support each other in fulfilling their respective mandates and to ensure comprehensive regulation, supervision, and oversight of a GSC arrangement across borders and sectors.
FSB High-level recommendation 4	Authorities should require that GSC arrangements have in place a comprehensive governance framework with clear and direct lines of responsibility and accountability for all functions and activities within the GSC arrangement.
FSB High-level recommendation 5	Authorities should require that GSC arrangements have effective risk management frameworks in place especially with regard to operational resilience, cyber security safeguards and AML/CFT measures, as well as “fit and proper” requirements, if applicable, and consistent with jurisdictions’ laws and regulations.
FSB High-level recommendation 6	Authorities should require that GSC arrangements have in place robust systems and processes for collecting, storing and safeguarding data.
FSB High-level recommendation 7	Authorities should require that GSC arrangements have appropriate recovery and resolution plans.
FSB High-level recommendation 8	Authorities should require that GSC issuers provide all users and relevant stakeholders with comprehensive and transparent information to understand the functioning of the GSC arrangement, including with respect to governance framework, redemption rights and its stabilisation mechanism.
FSB High-level recommendation 9	Authorities should require that GSC arrangements provide a robust legal claim to all users against the issuer and/or underlying reserve assets and guarantee timely redemption. For GSCs referenced to a single fiat currency, redemption should be at par into fiat. To maintain a stable value at all times and mitigate the risks of runs, authorities should require GSC arrangements to have an effective stabilisation mechanism, clear redemption rights and meet prudential requirements.
FSB High-level recommendation 10	Authorities should require that GSC arrangements meet all applicable regulatory, supervisory and oversight requirements of a particular jurisdiction before commencing any operations in that jurisdiction and adapt to new regulatory requirements as necessary and as appropriate.