The Summer of Public Consultations
This article is also published in French and is available at the following link
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In a previous post, I had shared my point of view on the different approaches that a regulator can have in developing a regulatory framework.
Coincidentally, several public consultations were launched on crypto-assets in the weeks that followed.
Here is a brief overview.
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IOSCO (international)
The International Organization of Securities Commissions (IOSCO) launched a consultation for detailed recommendations on how to regulate crypto-assets globally. This initiative aims to improve international standards for the regulation of crypto-assets, outlining how customers should be protected and how crypto-asset exchanges should meet the standards that apply to markets.
Jean-Paul Servais, President of IOSCO, underlined the need to end the regulatory uncertainty surrounding activities related to crypto-assets.
The recommendations cover six key areas, namely:
Conflicts of interest arising from the vertical integration of activities and functions,
Market manipulation, insider trading and fraud,
Cross-border risks and regulatory cooperation,
safekeeping and protection of client assets,
Operational and technological risks,
Individual access, adequacy and distribution.
IOSCO has opened a public consultation on its recommendations and intends to finalize them by the end of 2023.
It then expects individual jurisdictions to review their regulatory framework to ensure that it is up to standard and, where necessary, to quickly close regulatory gaps.
FSB (international)
The Financial Stability Board (FSB) is an international body that monitors the global financial system and makes recommendations about it.
The FSB promotes international financial stability by coordinating national financial authorities and international standards bodies that strive to develop sound regulatory, supervisory, and other financial sector policies. The policies developed under this program are implemented by national courts and authorities.
FSB Global Regulatory Framework for Crypto-Asset Activities
The FSB has established a global framework to regulate activities related to cryptocurrencies. This framework follows the principle of "same business, same risk, same rule" to ensure that activities related to cryptocurrencies and stablecoins are regulated in a uniform and comprehensive manner.
There are two parts to this framework: one for regulating, supervising and monitoring cryptocurrency activities and markets, and another for “global stablecoin” arrangements.
The FSB and the groups that set the standards for each sector have created a work plan for 2023 and beyond. This plan aims to develop a global regulatory framework that complements current and future laws and regulations.
High level recommendations for the regulation, supervision and monitoring of crypto-asset activities and markets
The FSB releasedan advisory report on the regulation, supervision and monitoring of crypto-asset activities and markets, including a series of recommendations.
The recommendations aim to promote a regulatory, supervisory and supervisory framework that is technologically neutral and focused on the activities and the underlying risks. The recommendations do not comprehensively address all specific risk categories associated with crypto-asset-related activities, such as anti-money laundering and counter-terrorist financing, data privacy, cybersecurity, consumers and investors, market integrity, competition policy, taxation, monetary policy, monetary sovereignty and other macroeconomic concerns.
Here is a summary of the topics of the recommendations:
Regulatory powers and tools: The FSB emphasizes that authorities must have the necessary powers and tools to effectively regulate crypto-assets. This means that regulators should be able to set rules and standards for crypto-assets, enforce those rules, and take penalties against entities that do not comply with regulations. The FSB also suggests that regulators may have the ability to monitor the crypto-asset market, collect data and analyze trends.
Cross-border cooperation : The FSB recommends that authorities cooperate and share information to effectively regulate crypto-assets that operate across borders. This can take the form of setting up information sharing agreements (see on the subject:DAC8) or participation in international forums to discuss the regulation of crypto-assets. Cross-border cooperation can help prevent regulatory arbitrage (forum shopping), where entities move their operations to jurisdictions with less stringent and/or non-existent regulations.
Risk management : The FSB suggests that authorities put systems in place to manage the risks associated with crypto-assets. This means that regulators should be able to identify, assess, monitor and mitigate risks. The FSB also suggests that regulators put contingency plans in place to deal with potential crises. These types of plans will ensure that they are prepared to respond effectively to market disruptions, financial crises or other adverse events such as those encountered in 2022 (Terra, Celsisu, BlockFi, FTX, …).
Data collection and reporting : The FSB recommends that the authorities collect data on crypto-assets. Regulators then need to have systems in place to collect data on the crypto-asset market, including data on trading volumes, market prices, and number of users. This data can help regulators understand the market, identify trends, and develop appropriate regulatory responses. The FSB also suggests that regulators release this data to the public, to promote transparency and accountability among players.
Remember that the FSB's mission is to develop and promote effective financial policies, but its decisions are not legally binding. Rather, they are guidelines to help us navigate the world of crypto-assets.
What does this mean to you ? It's simple. If you participate in the ecosystem, you should know these recommendations. They will help you understand the rules of the game and comply.
High Level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements
And the FSB published a review of its recommendations which aim to promote consistent and effective regulation, supervision and oversight of global stablecoin payment arrangements(Global Stablecoin Arrangements - GSC) in all jurisdictions, in order to address the potential risks they pose to financial stability, both domestically and internationally, while supporting responsible innovation and providing sufficient flexibility jurisdictions to implement national approaches.
The FSB has made ten recommendations that cover everything from regulatory preparedness to risk management.
These recommendations only apply to “global stablecoins” which according to the FSB definition are:
A stablecoin with existing or potential reach and use in multiple jurisdictions that could acquire systemic importance in and across one or more jurisdictions, including as a means of payment and/or a store of value.
Here are the key points of the recommendations:
Regulation, supervision and monitoringe: The FSB emphasizes that stablecoins must be subject to comprehensive regulation, oversight, and oversight. This is to ensure that they are not used for illegal activities and that they retain their “stable” value. This could involve establishing a dedicated regulatory body to oversee stablecoin activities, implementing strict KYC and AML policies, and ensuring that stablecoin issuers have the capital necessary to maintain stability. value of their stablecoins (see on the concept of reserve funds). The FSB also suggests that jurisdictions cooperate and share information to effectively regulate stablecoins that operate beyond their borders.
Legal clarity : The FSB recommends that stablecoins have a clear legal basis in all jurisdictions where they operate. This means that the rights and obligations of all parties involved (including users, issuers and intermediaries) must be clearly defined and enforceable. Legal clarity is crucial to protect users and maintain trust in stablecoins. This could involve creating a legal framework specifically for stablecoins, or adapting existing laws to cover stablecoins.
Strong governance framework : The FSB suggests that stablecoin agreements should have a strong governance framework. This includes a clear organizational structure, effective risk management procedures and transparent decision-making processes. A governance framework can help ensure that stablecoins operate safely and efficiently and can manage risk effectively.
Financial resilience : The FSB recommends that issuers of stablecoins must have adequate financial resources to withstand shocks. This could involve holding a reserve of assets to support the value of stablecoins or having access to liquidity facilities. Financial resilience is crucial to maintaining the stability of the stablecoin and protecting users.
Operational resilience : The FSB suggests that stablecoin issuers have robust systems in place to ensure operational resilience (see on this in Europe:DORA ACT). This includes secure and reliable technology systems, effective cybersecurity measures and contingency plans to deal with operational disruptions. Operational resilience is crucial to ensure that stablecoin issuers can continue to operate effectively under various conditions.
Effective risk management : The FSB recommends that stablecoin issuers have effective risk management frameworks in place. This includes putting in place procedures to identify, assess, monitor and manage risks. Effective risk management can help ensure that issuers of stablecoins can effectively manage risk and can continue to operate safely and efficiently.
Transparency: The FSB suggests that stablecoin issuers provide clear and comprehensive information to users. This includes providing information about users' rights and obligations, the risks associated with using the stablecoin, and the measures in place to protect users. Transparency is crucial to ensure users can make informed decisions and maintain trust in the stablecoin.
Mesures AML/CFT : The FSB recommends that issuers of stablecoins have effective anti-money laundering and anti-terrorist financing measures in place. This includes having procedures in place to identify and report suspicious transactions and to verify the identity of users. AML/CFT measures are crucial to prevent stablecoins from being used for illegal activities.
Cross-border cooperation : The FSB suggests that jurisdictions cooperate and share information to effectively regulate stablecoins that operate across borders. This could involve setting up information-sharing agreements or participating in international forums to discuss stablecoin regulation. Cross-border cooperation is essential to ensure that stablecoin issuers are effectively regulated in all jurisdictions where they operate.
Adaptability: The FSB recommends that regulatory, supervisory and oversight frameworks be adaptable and flexible to deal with the evolution of stablecoins. This might involve reviewing and updating regulations regularly and being open to new approaches to regulation. Evolution and adaptation is crucial to ensure that regulatory frameworks can deal effectively with new developments and challenges in the stablecoin industry.
The report also includes helpful appendices with key considerations on the design of cooperation agreements, a common reserve asset disclosure template, and potential elements for determining whether a stablecoin qualifies as a “global stablecoin.”
What is the conclusion to be drawn from this? If you are involved in stablecoins, these recommendations must be integrated into your roadmap while taking into account the European MICA regulation which (strictly) regulates the issuance of stablecoins.
ESMA (EU)
ESMA, the European financial regulatory institution, has launched a public consultation on certain technical standards relating to the implementation of the MiCA regulation. It published a consultation document and invites all interested stakeholders to respond.
This includes crypto-asset issuers, service providers, financial entities, and anyone with an interest in crypto-assets.
Deadline for response is fixed.as of September 20, 2023. ESMA will consider all comments received and may publish them, unless otherwise requested.
The document contains seven sections relating to:
Content, forms and notification templates : The document discusses the content, forms and templates required for the notification of activity by certain financial entities.
Application for Authorization of Crypto-Asset Service Providers (CASP) : It covers content, forms and templates for CASP (crypto-asset service provider) authorization request.
Complaints procedure : The document describes the complaint handling procedure for PSAPs.
Conflicts of interest : It deals with the identification, prevention, management and disclosure of conflicts of interest by PCSAs.
Assessment of projects to acquire qualifying holdings : The document covers the assessment of the planned acquisition of qualifying holding requirements.
ESMA will take into account the comments received during this consultation and plans to publish a final report and submit the draft technical standards to the European Commission for approval no later than June 30, 2024.
What is the conclusion to be drawn from this? If you are involved in crypto-assets, this consultation is important because it aims to set up the regulatory technical standards that will be used by national authorities in the context of the implementation of the European MICA regulation.
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Author: Florian Ernotte, founder of avroytech.
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Do you have an idea or a project? Are you lost in the flow of regulation? Let’s see how we can help!
