G20 Surveillance Report Highlights Crypto Firms Having Nowhere to Hide Under Global Rules

G20 nations

Amid increased calls for comprehensive digital asset legislation, the G20 Financial Stability Board (FSB), on July 17, published their final recommendations for regulating cryptocurrency trading companies. Focuses on issues related to regulatory oversight and surveillance of crypto assets to help foster innovation.

The regulator also revised its existing recommendations for stablecoins in light of the catastrophic collapse of the TerraUSD/Luna stablecoins.

The FSB noted that with globally agreed rules, crypto companies would have no choice but to introduce basic measures to avoid similar chaos like the FTX crash.

FTX Collapse Highlights Crypto’s Intrinsic Volatility and Structural Vulnerabilities

According to the watchdog, the Terra and FTX crash of 2022 underscored the inherent volatility and structural vulnerabilities of cryptocurrencies and related players.

FSB also stressed that the events of the past year show that the failure of a critical crypto service provider can transmit ripple effects throughout the ecosystem. The FSB fears that the risks of crypto engineering will spill over into the traditional financial ecosystem and cause financial instability.

“As recent events have illustrated, if ties to traditional finance were to grow further, the spillover effects of crypto-asset markets on the broader financial system could increase,” the FSB said.

The watchdog’s recommendations borrow universal safeguards from traditional finance to govern cryptocurrencies before the sector expands enough to pose threats related to financial instability.

The recommendations focus on three key areas: securing client assets, addressing risks related to conflicts of interest, and enforcing cross-border cooperation.

Its implementation would be jurisdictional, since each jurisdiction has a peculiar experience in the application of digital asset regulations.

The board will focus on the experiences of the jurisdictions and will be based on the principles of ‘same business, same risk, same regulations’ to ensure a high-level, flexible and technology-neutral implementation.

The Financial Stability Board reinforces the supervision of crypto companies to prevent risks to financial stability

The FSB wants to strengthen supervision of crypto companies to avoid conflicts of interest and institute measures to manage risks and liabilities.

Additionally, the regulatory framework requires crypto companies to provide adequate disclosures to ensure that customer funds are kept separate from company money.

The G20 FSB wants all countries, including non-member states, to implement its recommendations. It is worth mentioning that FTX was a Bahamas-based company, and Bahamas was not a member of the Financial Stability Board.

The watchdog believes that observing the recommended measures would prevent potential threats to financial stability, losses and risks associated with cryptocurrencies.

As quoted by Reuters, FSB Secretary John Schindler saying Crypto asset players must operate within the regulatory perimeter and stop violating existing rules.

“These players can no longer argue that there is a lack of regulatory clarity, as our framework clarifies the standards that need to be applied,” Schindler added.

Although the FSB recommendations mark a milestone in addressing the risks facing the crypto market, they do have their drawbacks.

It mainly addresses the potential risks of financial instability associated with cryptocurrencies. It does not cover all of the specific risk categories related to cryptocurrency activities.

The FSB expects further action from the BIS’s Basel Committee on Banking Supervision, the International Organization of Securities and Exchange Commissions (IOSCO) and other agencies to address the shortcomings.