At July’s G20 meeting in Buenos Aires, the Financial Stability Board (FSB), the international body that advises the G20 on global financial systems, presented a framework for monitoring cryptocurrency assets. This states that while crypto doesn’t currently pose a threat to financial stability, careful monitoring of the market is needed in future:
“While the FSB believes that crypto-assets do not pose a material risk to global financial stability at this time, it recognizes the need for vigilant monitoring in light of the speed of market developments.”
Waiting for consensus on crypto from G20
In the anti-climactic conclusion of the March meeting, financial policy-makers agreed only that a watchful eye should be kept on cryptocurrencies, setting a July deadline for the next step. It was hoped that the G20 meeting of Finance Ministers and Central Bank Governors in Buenos Aires, which ended on July 22nd, would produce some guidance on cryptocurrency regulation, however, none was given and any further action was postponed until October when the G20 awaits a further report from The Financial Action Task Force (FATF) on how money laundering and anti-terrorist funding standards apply to cryptocurrencies.
The Financial Stability Board is chaired by Bank of England head Mark Carney. His team have headed development of the framework, with assistance from the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS).
These organizations contribute to a discussion around the regulation of distributed ledger technology and, most significantly, the BCBS has created the initial framework for a metric that can quantify the “materiality of banks’ direct and indirect exposures to crypto-assets.”
A metric for monitoring the impact of cryptocurrency on the traditional financial system would allow the G20 group to keep tabs on “the size and rate of growth of crypto-asset markets” which the group sees as a potential risk.
To do this effectively, the FSB proposes periodically assessing a range of data metrics shown in the table below.
Wild swings in the price of bitcoin, and a rapidly evolving market, make devising a robust metric for this purpose a tricky task, and the FBS expect that it will require constant re-evaluation. The metric is also vulnerable to showing the distorted results of manipulation from practices that have long been prohibited in traditional markets:
Nevertheless, the FSB state that the metric will “provide a useful picture of crypto-asset markets and the financial stability risks they may present”, and with timely updates, will be able to keep pace with innovation.
Caution advised on national digital currencies
Despite acknowledging a decline of the use of cash in some jurisdictions, the FSB advises banks against rushing to develop Central Bank Digital Currencies, stating that while “‘safer central bank issued cash may be less convenient in an era of electronic payments”, so-called digital tokens do not present a claim to an underlying asset, and so make for unsafe money. Creating a Central Bank Digital Currency (CBDC) therefore, would be ‘a step into unchartered territory’.”
Instead, central banks are to be encouraged not to add “efficiencies at the cost of safety”, and “catalyse improvements to current arrangements” through continuing to implement innovations like faster payments.
In his letter to G20 finance ministers in March, Mark Carney also noted a number of issues around consumer and investor protection, and expressed concern over the use of cryptocurrency to shield illicit activities like money laundering and terrorist financing.
The report discusses regulatory risks arising from ICOs, with a focus on the importance of keeping an eye on the issues (both domestic and cross-border) raised by the offering of ICOs in jurisdictions across the globe. Cross-border challenges are also raised in the section on crypto asset platforms, which emphasizes the importance of suitable KYC obligations.