A new report by the Financial Stability Board said further assessments of possible implications are required because “significant information gaps remain.”

The collapse of crypto firms that engage in multiple activities isn’t a big threat to “the real economy,” according to a report by the Financial Stability Board (FSB) published Tuesday.

The report by the international standard-setter also said that further assessments are required because “significant information gaps remain.”

The FSB, which monitors financial systems and proposes rules to help prevent financial crises, said it was assessing the financial stability implications of multifunction crypto-asset intermediaries (MCIs) in July. MCIs are individual firms or groups of affiliated firms that combine a broad range of services, products and functions typically centered around the operation of a trading platform, according to the FSB. This could apply to numerous crypto heavyweights, like Coinbase or Binance.

The FSB warns that crypto firms combining different activities are more vulnerable to failure and that mitigating the impact of such a failure depends on how well global crypto regulation is implemented. The report also identified “information gaps” that require enhanced cross-border cooperation and information sharing.

The report found that the vulnerabilities of MCIs and firms in traditional finance are not very different. However, vulnerabilities increase when MCIs engage in proprietary trading, market-making on their own trading venues, and lending and borrowing.

The FSB said there is a need to assess whether disclosures and reporting requirements of MCIs are adequately covered or would warrant additional measures.

“Combining functions in MCIs that are typically restricted or separated for traditional finance appears prima facie inconsistent with the principle of ‘same activity, same risk, same regulation’,” the report said.

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Financial Stability Board plans could see stablecoins forced to centralize and crypto conglomerates broken up.

Stablecoins could be forced to centralize issuance and major crypto platforms broken up under plans put forward by the Financial Stability Board (FSB) Tuesday.

The Financial Stability Board, a watchdog agency and standard setter for the global financial system supported by central banks and finance ministries, wants to see a comprehensive international rulebook in the aftermath of recent crypto market turmoil, taking aim at conflicts of interest in multi-faceted operations and algorithmic stablecoins like the now-collapsed terraUSD.

“The current ‘crypto winter’ has reinforced our assessment of existing structural vulnerabilities in these markets,” Klaas Knot, the Dutch central banker who chairs the FSB, said in a letter to the finance ministers of the world’s 20 biggest economies.

He was referring to FSB concerns over liquidity mismatches, high leverage and inappropriate business models in the highly connected crypto ecosystem.

“This turmoil has once more underlined the need for a comprehensive approach to crypto-asset regulation,” Knot added, after a volatile year that saw the price of major assets like bitcoin (BTC) and ether (ETH) tumble, and the total collapse of companies like crypto lender Celsius Network. Tuesday’s reports are a “major step” towards that framework, Knot added.

Extend, innovate

A report published for consultation by the FSB Tuesday calls for jurisdictions across the world to extend existing financial norms and develop new ones for novel crypto risks.

It puts off delving deeply into new areas like decentralized finance (DeFi), promising a fuller policy assessment next year, but warns that failure to disclose governance roles can prevent regulators from finding out who’s responsible in some supposedly decentralized structures.

The report said some crypto companies are already breaching the law by combining traditionally separate activities like trading, lending, custody and brokerage, and called on national authorities to step in and break them up if there are heightened risks or conflicts of interest.

Crypto Regulations in October

“Various crypto-asset activities are often bundled together within a single entity, sometimes in non-compliance with existing regulations,” the report said. “Authorities should enforce their powers and use their tools as appropriate and in line with jurisdictional legal frameworks, including disaggregation and separation of certain functions.”

The FSB warns of extra risks when wallet providers offer services for stablecoins – cryptocurrencies which seek to maintain their value against conventional assets such as the U.S. dollar. Disruptions to a wallet service could allow for malicious transfers, potentially leading to a stampede from panicking customers, and there’s often no clarity on what happens if a provider goes bankrupt, the report said.

A separate report also published for consultation Tuesday seeks to tighten up international stablecoin rules, even though it says most industry players are already struggling to keep up with current norms dating back to 2020.

“Most existing stablecoin arrangements do not meet the FSB’s High-level Recommendations,” the report said, citing deficiencies across the board in areas such as governance, risk management, and regulatory disclosures.

Shutting the stablecoin door

Under new FSB plans, stablecoins that are usable in multiple jurisdictions could be forced to centralize governance, and wouldn’t be able to use automated algorithms to maintain value like 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.”

That aims to address crucial errors in the design of terraUSD – which purported to maintain value being exchangeable with a companion token, luna. That crucially depends on having liquid trading, which is unlikely in cases where there is an abrupt collapse in confidence.

The FSB has no enforcement power, and will rely on peer pressure to avoid a scenario where crypto companies can pick and choose whichever jurisdiction offers the lightest regulatory load.

Consultations are open until mid-December, with the FSB aiming to finalize the recommendations by the middle of next year.

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The Financial Stability Board joins tax and money-laundering bodies in responding to calls for coordinated international action to regulate the industry.

The Financial Stability Board (FSB) could lead on formulating global regulations to cover crypto assets, its chair, Klaas Knot, said.

“The FSB is well placed to take a leading role in the design of a coherent global regulatory framework for crypto assets,” Knot said at the annual meeting of the International Swaps and Derivatives Association in Madrid.

The Basel, Switzerland-based FSB reports to the Group of 20 of the world’s largest economies, and develops rules intended to stop 2008-style crises, such as those applying to major international banks deemed too big to fail.

The Dutch central banker appeared to respond to a call from jurisdictions such as the European Union for an international framework for the sector, mirroring the kind of global rules brought in for banks and the financial system after 2008.

The FSB, which in February warned about the risk a growing and largely unregulated sector could pose for investor confidence and financial crime, is due to produce a report on stablecoins in October. It would join international standard-setters such as the Financial Action Task Force and OECD, which are respectively responsible for developing anti-money laundering and tax rules for the sector.

It wouldn’t have to start from scratch, Knot said, and would first consider the existing laws that already apply to crypto.
“This will provide a basis for additional work to address risks not covered by these pre-existing standards,” he said. “Crypto asset markets of today are not operating in a lawless environment, or a barren regulatory landscape.”

Earlier this month, the EU’s financial services commissioner, Mairead McGuinness, called for a “global agreement on crypto” to protect investors, safeguard stability and limit the environmental impact of bitcoin (BTC) mining, and she seems to have found support within the block.

Global rules are “the right idea,” EU lawmaker Stefan Berger, architect of the bloc’s domestic crypto law known as MiCA, said at an event in Brussels Monday. “We need, in the end, worldwide regulation.”

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