Industry Divided Over FSB Crypto Approach: ‘Same Activity, Same Risk, Same Regulation’
The inconsistency of cryptocurrency regulations has posed a significant challenge for the digital currency industry. Varying classifications of cryptocurrencies as either currencies or investments across different countries have led to confusion and ambiguity regarding the appropriate regulations. In an effort to establish consistency, the Financial Stability Board (FSB) is currently in the process of finalising a global regulatory framework for crypto-asset activities
Blockchain technology and crypto have opened the floodgates for fintech innovation, however, as with every investment opportunity, there are risks to investing in it. The FSB has decided to build the new framework upon the principle of ‘same activity, same risk, same regulation.’ This means that crypto-asset activities and stablecoins will be subject to consistent and comprehensive regulation, equal to the risks they pose. In turn, this should protect consumers while encouraging responsible innovations.
The framework consists of two distinct sets of recommendations:
- High-level recommendations for the regulation, supervision and oversight of crypto-asset activities and markets;
- Revised high-level recommendations for the regulation, supervision, and oversight of “global stablecoin” arrangements.
According to the FSB: “The recommendations focus on addressing risks to financial stability, and they do not comprehensively cover all specific risk categories related to crypto-asset activities. They take account of lessons from events of the past year in crypto-asset markets, as well as feedback received during the public consultation of the FSB’s proposals. Central bank digital currencies (CBDCs), envisaged as digitalised central bank liabilities, are not subject to these recommendations.”
The FSB has also released an umbrella public note to accompany the final framework. In it, it describes how the two distinct sets of recommendations build a framework for the regulation. It further details supervision and oversight of global stablecoins arrangements and other crypto-asset activities too.
Is ‘same activity, same risk, same regulation’ the right approach?
Following the announcement, we reached out to the industry to find out if it members agreed with the FSB’s approach.
Gabriel Mezhrahid, senior legal counsel at Coremont LLP, the cloud-based investment management solution, says new regulations should be created for the new asset class, rather than forcing old regulations onto it: “While there is industry consensus, shared by law makers, that regulations are critical to protect investors – the FSB’s ‘same activity, same risk, same regulation’ credo fails to meet expectations to create a new asset class around digital assets.
“On first sight, the FBS’s logic seems unassailable: existing securities frameworks in G20 jurisdictions provided certainty to investors for decades. So why not apply the same rules to digital assets? Yet, digital assets inherently differ from existing asset classes by virtue of their dematerialised and decentralised nature, complicating parallels with securities or commodities law.
“Extant bodies of laws were drafted to match standards inapplicable to digital assets. For example, company directors’ breach of fiduciary duties, firmly established for securities, cannot have an equivalent in the context of decentralised assets.
“The FSB proposal, similar to the EU Parliament’s MiCA regulation inspired by MiFiD II, tries to ‘make
new with old’ – and has rightly caused headshaking among specialised lawyers.”
The other side of the coin
However, not everyone shares similar disappointment in the principle. Mriganka Pattnaik, CEO of Merkle Science, the blockchain transaction monitoring and intelligence solution provider, explains why the FSB is ticking all the boxes when it comes to properly regulating cryptocurrencies while encouraging innovation.
“The ‘same activity, same risk, same regulation’ principle is one of the FSB’s most forward-thinking approaches to regulating crypto-asset activities. This standardisation will help minimise instances of regulatory arbitrage, where businesses might seek to exploit less regulated jurisdictions or certain forms of business.
“Because all organisations will now be treated equally under the regulatory lens if they are conducting similar financial activities, this principle promotes fair competition. This will ultimately lead to greater industry innovation.
“The ‘same activity, same risk, same regulation’ principle is not only ideal – more importantly, it is practical.
“The volatility, uncertainty, complexity, and ambiguity (VUCA) of the modern world is also famously reflected in cryptocurrency, which is ever-changing. By giving organisations the freedom to use different modes of operation in building cryptocurrency-based businesses, more enterprises can enter into the space to seize market opportunities. This diversity of approaches to cryptocurrency products and services will quickly give rise to the generation-defining solutions that drive mass adoption among consumers and businesses.”
CBDC development can only continue through open collaboration
Notably, the FSB points out that the implementation of the new rules won’t impact CBDCs. Due to this, Alisa DiCaprio, chief economist at R3, a provider of enterprise distributed ledger technology (DLT) and services, explains why open collaboration between banks and regulators is necessary in order to progress CBDC development.
“Today’s financial system continues to face challenges without innovation using the correct technologies.
“For example, expensive and slow settlement, siloed systems and an overreliance on account-to-account transfer could all heighten credit risks.
“These are all issues that CBDCs can help overcome by enabling faster and more efficient liquidity management. It’s therefore unsurprising to see central banks continue to ramp up their digital currency exploration.
“Despite the rapid pace of progress, there are still many questions around CBDC issuance that are still being explored – particularly around smart regulation and privacy. Open collaboration between central banks, regulators and technology providers across public and private sectors will be key in ensuring a carefully thought-out and solid design process that delivers resilience, interoperability, and privacy.”
Complementing growth for stablecoin regulation
Eugen Kuzin, CMO at the crypto payment ecosystem CoinsPaid, points out that crypto’s liquidity could be impacted negatively in the long run if regulations become tighter. However, for the time being, they only raise regulatory awareness: “The FSB calling for high standards in safeguarding client assets and avoiding conflict of interest does not come without its basis.
“The collapse of major companies over the past year which has fueled a lack of trust justifies the stance. The adoption of the rules by the G20 will enable the top crypto platforms operating in these countries to become more regulatory conscious, an adherence that will cause no harm.
“Suppose the individual implementation of these recommendations by the G20 becomes more stringent. In that case, it may impact crypto’s liquidity negatively in the long run as investors will go to areas with fewer rules. The recommendations may also complement the growing clamour for stablecoin regulation which now has its own unique provisions under the EU’s MiCA framework.”
Acting as the global umpire
Bianca Veleva, head of legal and regulatory compliance at Nexo, the regulated digital asset institution, credits the FSB’s regulatory proposal for potentially tackling a long-standing issue in the crypto sphere: regulatory stability.
“Overall, the FSB is acting as a global umpire with a core focus on supporting investors and financial stability. With the market being fragile, only proper accountability can help crypto innovators not overshoot their leverage as we saw with FTX. However, the regulators must factor in counsel from industry stakeholders before they put out the final rules.
“Тhe FSB’s global regulatory framework for crypto-asset activities has the charge to be transformative for the crypto industry. The FSB’s commitment to globally consistent regulation is essential. It will provide clarity, reduce regulatory arbitrage, and instill confidence in investors and institutions – a step towards the (potentially) cross-border and long-term regulatory stability our space has painfully lacked over the years.
“The suggested regulations strike a balance between risk mitigation and innovation, fostering growth without stifling progress.”
