The ongoing crypto winter has caught the eye of financial watchdogs and some disruption is brewing.
After the recent turmoil in the cryptocurrency market, the Financial Stability Board, a watchdog organization and standard-setter for the global financial system supported by central banks and finance ministries, wants to see a comprehensive international rulebook that targets conflicts of interest in complex operations and algorithmic stablecoins like the now-defunct terraUSD.
Plans put forth by the Financial Stability Board (FSB) Tuesday called for the centralization of stablecoin issuance and the dissolution of significant crypto platforms.
FSB chair Klaas Knot communicated the watchdog’s concerns. In the highly interconnected crypto economy, the FSB has worries about liquidity mismatches, heavy leverage, and improper business models.
In a letter addressed to the finance ministers of the world’s 20 biggest economies, Knot said;
“The current ‘crypto winter’ has reinforced our assessment of existing structural vulnerabilities in these markets. This turmoil has once more underlined the need for a comprehensive approach to crypto-asset regulation.”
Knot lauded a report published for consultation on Tuesday by the FSB as a major step towards creating a framework that will see global jurisdictions broaden current financial regulations and create new ones that protect against crypto hazards.
The FSB report calls for the postponing of digging further into new sectors like decentralized finance (DeFi), promising a more thorough policy evaluation next year but cautions that failing to disclose governance responsibilities can hinder regulators from identifying who is accountable in some ostensibly decentralized organizations.
According to the report, some cryptocurrency businesses are already breaking the law by combining legally distinct activities like trading, lending, custody, and brokerage. It urged national authorities to intervene and dissolve these businesses if there were increased risks or conflicts of interest.
The report also calls for the “disaggregation and separation of certain functions” as remedies in line with “jurisdictional legal frameworks” to be used by authorities should they find crypto-asset activities being bundled together within a single entity. They can also use those remedies to deal with cases of non-compliance with regulations.
The FSB warns of extra risks when wallet service providers introduce support for stablecoins, which are cryptocurrencies that aim to hold their value versus traditional assets like the US dollar. It’s frequently unclear what happens if a provider goes bankrupt, and disruptions to a wallet service could allow for malicious transfers, potentially resulting in a rush from terrified users, the report added.
A separate report that was also released for consultation proposes to tighten up international stablecoin laws. The report says that most stablecoin projects do not meet the FSB’s high-level recommendations.
Under new FSB plans, stablecoins with widespread acceptance might be forced to centralize governance and would be unable to use automated mechanisms to preserve value, as the “flawed” terraUSD did.
“Authorities should require that GSC [global stablecoin] issuance be governed and operated by one or more identifiable and responsible legal entities or individuals,” the report said. “A GSC should not rely on arbitrage activities to maintain a stable value at all times and it should not derive its value from algorithms.”
This tries to correct significant flaws in the design of terraUSD, which claimed to preserve value by being able to be exchanged for a companion coin called luna. This critically depends on liquid trade, which is improbable in situations where confidence suddenly collapses.
The FSB will rely on peer pressure since it lacks enforcement authority to prevent a situation in which cryptocurrency enterprises could choose the country with the least restrictive regulations.
The FSB intends to complete the proposals by the middle of next year, and consultations are still open as of mid-December.
