FSB publishes proposals for a stricter global cryptographic framework

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The Financial Stability Board (FSB) has called for better global regulation of digital assets with the security of user assets at the center of policies.

The international financial body that acts as a standards setter has released plans to offer recommendations to help curb the cryptocurrency-related turbulence that hit the market last year.

According to the agency, the need for a strict regulatory framework derives from the principle of “same activity, same risk, same regulation.”

He proposals were made to members of the major G20 economies consisting of rules governing virtual assets and stablecoins broken down into “high-level recommendations and revised high-level recommendations for a global stablecoin.”

Primarily, the FSB cites the mix of user funds as a major factor in the collapse of cryptocurrency-related entities, including exchanges and banks.

According to the statement, mixing user assets was critical to the decline from FTX in November and Terra in April 2022, while citing the brief decoupling of USD Circle (USDC) as a major reason to strengthen stablecoin rules of thumb to dodge the next bullet.

To avoid a conflict of interest, user funds should be distinguished from platform assets, making it easier for regulators to audit companies and ensure transparency in foreign jurisdictions.

“…i) ensure adequate protection of client assets; (ii) address the risks associated with conflicts of interest; and (iii) strengthen cross-border cooperation”.

The body exempted the Digital Currencies of the Central Bank (CBDC) of these recommendations, as they have significantly lower risk compared to other crypto assets.

Unpegging: The Stablecoin Headache

The body has warned regulators to take stablecoin regulations to the next level, particularly global stablecoins used in multiple jurisdictions.

According to the body stablecoin Issuers must obtain a permit in their primary jurisdiction to maintain secure best practices.

“Authorities should not allow a GSC arrangement to operate in their jurisdiction unless the GSC arrangement meets all regulatory, supervisory, and oversight requirements of their jurisdiction, including affirmative approval.”

In addition, he explained that issuers must have at least one identifiable legal body or group of people known as a “governing group” to ensure accountability.

Issuers must hold 1:1 reserve assets or be subject to all requirements imposed on commercial banks to prevent stablecoins from losing their peg.

Finally, it recommends full compliance by crypto companies with regard to disclosure and strict scrutiny by regulators.

“Authorities should have access to data as necessary and appropriate to fulfill their regulatory, supervisory, and supervisory mandates.”