Author: Colin Wu, Wu Blockchain
Recently, the People's Bank of China released the China Financial Stability Report (2024), which extensively mentioned the global regulatory dynamics of cryptocurrencies in multiple paragraphs, and particularly highlighted the progress of cryptocurrency compliance in Hong Kong.
Page 47 (Non-bank Institutions and Others)
Regulatory authorities in various countries have continued to strengthen the regulation of crypto assets. After a series of risk events shook the crypto asset market in 2022, the prices and trading volumes rebounded significantly in 2023, with the global market value of crypto assets reaching $1.55 trillion at the end of the year, an increase of 10.71% year-on-year. Given the potential spillover risks that crypto assets may pose to the stability of the financial system, regulatory authorities in various countries have been increasing the intensity of crypto asset regulation. Currently, 51 countries and regions have introduced prohibitions on crypto assets, and some economies have adjusted their existing laws or enacted new legislation to regulate them.
The United States regulates the actions of crypto asset issuers that violate the Securities Act based on existing regulatory laws. The U.S. Securities and Exchange Commission (SEC) has rejected more than 20 applications for spot TRON ETFs from 2018 to 2023. After approving the listing of a TRON spot ETF in January 2024, the SEC chairman stated that this does not mean the SEC has approved or endorsed TRON products, and investors should still be cautious about the risks associated with TRON and products linked to the value of crypto assets;
The European Union has approved the Regulation on Crypto-Asset Markets, establishing the world's first comprehensive and clear regulatory framework for virtual assets. This regulation is scheduled to be formally implemented by the end of 2024;
The United Kingdom has accelerated the pace of virtual asset legislation, promulgating the Financial Services and Markets Act, which includes crypto assets within the scope of regulation;
Singapore has released the Stablecoin Regulatory Framework, clearly defining the scope of regulated stablecoins and the conditions for issuers;
Japan has formulated the Payment Services Act, restricting the issuance of stablecoins to licensed banks, registered fund transfer agents, and trust companies.
Hong Kong, China is actively exploring the management of crypto asset licenses. Hong Kong, China will regulate virtual assets in two categories: securitized financial assets and non-securitized financial assets. It will implement a special "dual license" system for virtual asset trading platform operators, where "security tokens" are subject to the regulation and licensing system under the Securities and Futures Ordinance, and "non-security tokens" are subject to the regulation and licensing system under the Anti-Money Laundering Ordinance. Institutions engaged in virtual asset business must apply for a registration license from the relevant regulatory authorities before they can operate. At the same time, large financial institutions such as HSBC and Standard Chartered Bank are required to include crypto asset exchanges in their daily customer supervision.
Macroprudential Management Section on Page 67
In recent years, crypto asset activities have become increasingly complex, with significant market volatility. Overall, the linkages between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure are limited, but as the application scenarios of crypto assets in payments and retail investment increase, crypto assets may pose risks in some economies.
The FSB and relevant standard-setting bodies have jointly developed a global regulatory framework for crypto assets, guided by the principle of "same business, same risks, same regulations" to help regulatory authorities address the financial stability risks associated with crypto assets.
The IMF and FSB have developed a regulatory policy roadmap to identify and address the macroeconomic and financial stability risks posed by crypto assets. The roadmap outlines the work related to the implementation of the regulatory policy framework for crypto assets, aiming to promote global information sharing and cooperation, and fill the data gaps required for the rapidly changing crypto asset ecosystem.
Special Column 16
The Financial Stability Board Releases the International Regulatory Framework for Crypto Assets
In July 2023, the FSB released the International Regulatory Framework for Crypto Assets, proposing high-level regulatory recommendations for crypto assets and "global stablecoins", with the aim of enhancing the global consistency of regulatory approaches to the crypto asset industry, reducing regulatory loopholes and preventing regulatory arbitrage, and effectively preventing financial risks.
I. Two Regulatory Recommendation General Principles
1. The principle of "same business, same risks, same regulations". If the business of crypto assets or "global stablecoins" has the same economic functions as traditional financial business and is accompanied by the same types of financial risks, they should be subject to the same regulatory requirements.
2. The principle of flexibility. Regulatory authorities in various economies can apply existing laws and regulations to the crypto asset industry, or they can formulate new laws and regulations to implement the relevant regulatory recommendations.
3. The principle of technological neutrality. Regulatory authorities in various economies should regulate based on the economic functions and risk characteristics of crypto asset business, rather than their underlying technology.
II. Regulatory Recommendation Content
The two regulatory recommendations propose specific requirements for regulatory authorities, crypto asset issuers, and service providers.
(I) "High-Level Recommendations for the Regulation, Supervision and Oversight of Crypto-Asset Markets and Activities" (CA Recommendations)
The CA Recommendations include 9 high-level recommendations.
1. Regulatory Powers and Tools. Regulatory authorities should have appropriate regulatory powers, tools, and sufficient resources to regulate crypto assets, and be able to effectively enforce relevant laws and regulations.
2. Comprehensive Regulation. Regulatory authorities should implement comprehensive regulation commensurate with the risks of crypto assets, in accordance with the principle of "same business, same risks, same regulations". This includes developing regulatory policies that match their risks, scale, complexity and systemic importance; assessing whether existing regulatory measures can address the financial stability risks posed by crypto assets and expanding or adjusting the regulatory scope as appropriate; and unifying the regulatory standards between the crypto asset market and the traditional financial market, fully protecting the interests of all relevant parties.
3. Cross-border Cooperation, Coordination and Information Sharing. Given the cross-border nature of crypto assets, regulatory authorities should fully consider their spillover risks, promote efficient communication, information sharing and consultation between domestic and foreign authorities, and drive regulatory consistency.
4. Governance Framework. Crypto asset issuers and service providers should establish and disclose a comprehensive governance framework that matches their risks, scale, complexity and systemic importance, and the potential financial stability risks they may pose, with clear accountability mechanisms and procedures for identifying, addressing and managing conflicts of interest.
5. Risk Management. Crypto asset issuers and service providers should establish an effective risk management framework: able to identify, measure, assess, monitor, report and manage all material risks; have a reputable management team that can effectively supervise compliance issues; establish contingency plans and business continuity plans (BCPs), comply with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protect client assets and reduce the risk of client asset damage, abuse or inability to redeem on time.
6. Data Management. Crypto asset issuers and service providers should establish a comprehensive data management system: ensure the integrity and security of data, comply with data security-related laws and regulations; promptly correct erroneous data and ensure reliable data quality; be able to comprehensively, timely, accurately and continuously report relevant data information; support cross-economic data sharing to improve public understanding of crypto assets.
7. Information Disclosure. Crypto asset issuers and service providers should make full information disclosure. The information disclosed should include necessary information such as operations, transactions, management and product risk characteristics; custody relationship terms, client asset protection measures and custodian bankruptcy risks; and major technical risks such as cybersecurity risks and environmental and climate risks.
8. Addressing Financial Stability Risks Arising from the Linkages between the Crypto Asset Ecosystem and the Financial System. Regulatory authorities should effectively monitor the internal interconnections within the crypto asset ecosystem and the interconnections between the crypto asset ecosystem and other financial systems, identify and mitigate potential financial stability risks.
9. Comprehensive regulation of multi-functional cryptocurrency service providers. Regulatory authorities should require service providers to build an organizational management system that is consistent with their overall strategy and risk status; when service providers fail to comply with existing regulations or have serious conflicts of interest, strong measures should be taken in accordance with the law; closely guard against concentration risk and related transaction risk, and formulate additional prudential regulatory requirements if necessary; require cross-border service providers to share information to prevent risks from spreading overseas.
(II) "High-Level Recommendations on the Regulation of 'Global Stable Coins'" (GSC Recommendations)
The GSC Recommendations include 10 high-level recommendations. In addition to the 7 requirements similar to the CA Recommendations, such as regulatory powers, governance framework, and risk management, 3 additional recommendations are proposed.
1. Recovery and resolution plans. "Global Stable Coins" should develop appropriate recovery and resolution plans to support orderly liquidation or resolution within the legal framework, and ensure that critical functions and activities can be restored or continue to operate.
2. Redemption rights, stability and prudential requirements. Strong legal claims or guarantees should be provided to users for the issuers or underlying reserve assets of "Global Stable Coins", and timely redemption should be ensured: explain to users the redemption procedures, redemption fees and claim situations, including how to ensure smooth redemption in stress scenarios; the reserve assets should be equal to the amount of stable coins in circulation, and the reserve assets should be unencumbered, easily realizable and high-quality, highly liquid assets; when the issuer goes bankrupt, the ownership of the reserve assets should be protected; comply with prudential requirements (including capital and liquidity requirements) and have sufficient liquidity to cope with capital outflows.
3. Pre-operational regulatory requirements. "Global Stable Coins" should meet the market access requirements (such as licenses or registration) of the economy where they operate before commencing operations, and build the necessary products and systems to adapt to the new regulatory requirements.
III. Progress and Future Outlook
Follow up on the policy implementation of member states. Track the major market and regulatory dynamics since the release of the regulatory recommendations, summarize the progress, best practices and challenges faced by FSB members in implementing the high-level regulatory recommendations for cryptocurrencies and "Global Stable Coins".
Evaluate the effectiveness of regulatory recommendations. By the end of 2025, cooperate with relevant international organizations to evaluate the implementation of regulatory recommendations by member economies, ensure comprehensive and consistent implementation of regulatory recommendations, and consider whether it is necessary to update the recommendations.
Continuously research and improve regulatory policies. Study the potential financial risks of multi-functional cryptocurrency service providers, and assess whether additional regulatory policies need to be developed based on potential impacts.
Expand the scope of implementation and monitoring. Work with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations in non-FSB members, and reduce the risk of regulatory arbitrage. Invite non-FSB member economies with significant cross-border cryptocurrency businesses to join the FSB's relevant working groups to expand the scope of cross-border cryptocurrency monitoring.
