Plan to harmonise global crypto regulation could change FCA regulatory perimeter

David Hamilton of Pinsent Masons said a plan outlined by the global Financial Stability Board (FSB) to deal with important structural changes affecting the international financial system, including crypto assets, was a “welcome development”. He said the FSB’s plan, set out in a letter to G20 leaders (4 pages / 108KB PDF) ahead of their meeting this week in Washington DC, could eventually lead to all forms of crypto assets coming within the FCA’s regulatory perimeter.

Currently, the UK’s financial regulator generally has oversight of security tokens, stablecoins and other crypto assets that behave like e-money, while exchange tokens such as bitcoin remain unregulated investments. While the government plans to extend the FCA’s financial promotions regime to a broader range of crypto assets, this will not include non-fungible tokens (NFTs).

Hamilton suggested that a “more harmonised cross-border approach to crypto regulation” could push ministers to hand the FCA “a broader suite of powers”, potentially allowing it to supervise firms involved in advising or bringing about deals in crypto investments, hold individuals to account for their conduct, and take enforcement action in crypto fraud cases.

His comments came after the FSB, established by the G20 in 2009 to monitor the global financial system, told its leaders that “turmoil” in crypto asset markets had validated the board’s concerns about “their intrinsic volatility and structural vulnerabilities”. Klaas Knot, chair of the FSB, wrote that the turmoil “underlined the need for a comprehensive approach to crypto-asset regulation” across the world.

Knot warned that algorithms and arbitrage activities “are not effective stabilisation mechanisms” and said global authorities must “develop a better understanding of the broader macrofinancial implications” of crypto assets, including for “macroeconomic stability cross-border flows” and monetary policy.

He told the G20 that the public expected policymakers to develop a “robust international framework to identify, monitor and address” the risks posed by crypto assets, adding that the FSB’s reports on stablecoins, crypto asset activities and markets were “a major step in that direction”.

“The appropriate regulation of crypto assets, based on the principle of ‘same activity, same risk, same regulation’, will provide a strong basis for harnessing the potential benefits associated with this form of financial innovation while containing its risks,” Knot wrote.

Hamilton called the intervention “a welcome development” but expressed doubt over the FSB’s ability to harmonise cross-border financial regulations. “The decentralised nature of crypto assets has contributed to a fragmentation of regulation between jurisdictions, with some governments taking wildly different approaches,” he said.

“Given these historical differences, the project will have its fair share of challenges to surmount – not least deciding which regulatory approaches should be held up as the standard to follow. Since the FSB has no power to impose laws, how will each G20 member state react when it comes to implementing and interpreting a harmonised framework into domestic law? There is certainly plenty to consider,” Hamilton added.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) published a new global tax transparency framework for the automatic exchange of information relating to crypto assets, following a request from the G20. The crypto asset reporting framework (104 pages / 3.13MB PDF) (CARF) will be presented to G20 finance ministers and central bank governors for discussion this week.

The OECD said that many crypto assets, along with exchanges and wallet providers, are not comprehensively covered by its Common Reporting Standard which increased the likelihood of their use for tax evasion. It added that the CARF will ensure transparency in crypto asset transactions by targeting any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.