After the European MiCA and TFR regulations, which more strictly frame crypto-assets, Web3 is not made by the regulators. As the High Council for Financial Stability (HCSF) reminds us in its 2022 annual report, published on October 25, the next wave of regulations must come from international bodies: the Financial Stability Council (CSF or FSB in English) , and the Basel Committee that brings together central bank governors and supervisors from 27 countries and establishes prudential rules for the sector.
No systematic risk… but still
In its report, the HCSF, which monitors systemic risk in the French financial sector, looks at the crypto-asset market. He concluded that the sector “It does not seem to represent a systemic risk at this stage, due to its relatively limited size and weak connections with traditional finance”. However, he noticed a “lack of reliable data” and “the growth of contagion channels due to the growing interest of traditional investors”which led him to conclude that a “International coordinated regulation is needed”.
These contagion channels are the development of crypto-assets settlement services by major players in the payment sector (Visa, Mastercard, etc.) and investments such as ETFs indexed to cryptocurrencies , the creation of crypto derivative products, and the composition of reserves backing some stablecoins, except for US Treasuries.
HCSF also highlighted the many risks associated with these markets: volatility, leveraged products, lack of transparency, complexity for the uninitiated, management of DAOs (decentralized autonomous entities organization), security breaches, hacks, anonymization of transactions…
“Same risks, same rules”
This internationally coordinated regulation is currently being drafted. The FSB was published on October 11regulatory framework for crypto-assets, based on principle “same activities, same risks, same rules” : the idea is to regulate traditional finance and crypto-assets in the same way as long as intermediaries and products perform the same function. This proposal also relates to stablecoins, these cryptocurrencies that are backed by currencies. It is open for consultation until December 15.
“Crypto-asset markets are developing rapidly and may reach a point where they threaten global financial stability due to their size, structural weaknesses and increasing reliance on traditional financial system”says the FSB.
Strengthened prudential rules for banks
For its part, the Basel Committee on Banking Supervision was opened on June 30, 2022 aof its proposals for the prudent treatment of crypto-assets for banks, the first version of which was released in June 2021. The regulatory framework is expected to be adopted by the end of the year.
This should impose higher prudential requirements on banks exposed to crypto-assets (the capital required should be allocated according to the exposure), especially for cryptocurrencies and stablecoins whose stabilization mechanisms are not considered which is satisfactory. For the riskiest assets, banks must provide a capital charge equal to the amount exposed to absorb all potential losses.
The response of the players in the financial world in this consultation boils down, roughly speaking, to the demand for a regulatory framework that is less strict for banks, at the risk that they will not accept the potential of the sector.
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