Author: 01 Metaverse
On December 27, 2024, the People's Bank of China released the "China Financial Stability Report (2024)" (hereinafter referred to as the "Report"). The report elaborates on the field of crypto assets in many places, focusing on the regulation of crypto assets.
Since the release of the policy declaration on the development of the virtual asset market in October 2022, the development and regulatory system of the crypto asset market in Hong Kong, China has attracted much attention. In the "Report", a special paragraph is used to briefly describe Hong Kong's crypto asset regulatory model.
In the third part of "Chapter 3 Non-bank Institutions and Others", "Other Industries and Emerging Risks", the first focus is "Crypto Assets".
III. Other Industries and Emerging Risks
(I) Crypto-assets
Regulatory authorities in various countries continue to strengthen the supervision of crypto-assets.
After the crypto-asset market experienced a series of risk events in 2022, prices and trading volumes rebounded significantly in 2023. At the end of the year, the global market value of crypto-assets reached US$1.55 trillion, a year-on-year increase of 10.71%. In view of the possible spillover risks of crypto-assets to the stability of the financial system, regulatory authorities in various countries have continuously increased their supervision of crypto-assets. At present, 51 countries and regions in the world have issued prohibition regulations on crypto-assets, and some economies have adjusted their original laws or re-legislated regulations. Based on existing regulatory laws, the United States regulates the behavior of issuers of crypto assets that violate the Securities Act. The U.S. Securities and Exchange Commission (SEC) has rejected more than 20 applications for spot Bitcoin ETFs from 2018 to 2023. After approving the listing of Bitcoin spot ETFs in January 2024, the chairman of the SEC said that this does not mean that the SEC has approved or recognized Bitcoin products, and investors should still be cautious about the risks associated with Bitcoin and products whose value is linked to crypto assets; the European Union approved the Crypto Asset Market Regulation Act, establishing the world's first complete and clear regulatory framework for virtual assets, which is scheduled to be formally implemented at the end of 2024; the United Kingdom accelerated the pace of virtual asset legislation and promulgated the Financial Services and Markets Act, which included crypto assets in the scope of the Act; Singapore issued the Stablecoin Regulatory Framework, which clarified the scope of regulated stablecoins and the conditions for issuers; Japan formulated the Funds Settlement Act, which limits the issuers of stablecoins to licensed banks, registered transfer agents, trust companies and other institutions. Hong Kong, China is actively exploring the management of crypto asset licenses.
Hong Kong, China, divides virtual assets into two categories for supervision, namely, securitized financial assets and non-securitized financial assets, and implements a special "dual license" system for operators of virtual asset trading platforms, namely, "security tokens" are subject to the supervision and licensing system of the Securities and Futures Ordinance, and "non-security tokens" are subject to the supervision and licensing system of the Anti-Money Laundering Ordinance. Institutions engaged in virtual asset business must apply for registration licenses from relevant regulatory authorities before they can operate. At the same time, large financial institutions such as HSBC and Standard Chartered Bank are required to include crypto asset exchanges in the scope of daily customer supervision.
In the first part of "Chapter 5 Macroprudential Management" "International Financial Regulatory Reform and Implementation Progress", the "Report" mentioned the Basel Committee on Banking Supervision (BCBS)'s attention to the risks of crypto assets, the regulatory roadmaps of the IMF and FSB, and used a special column to explain "The Financial Stability Board Releases an International Regulatory Framework for Crypto Assets".
I. Progress in the Reform and Implementation of International Financial Regulation
(I) Promoting the Improvement of Regulatory Rules in the Global Banking Industry
The Basel Committee on Banking Supervision (BCBS) continues to monitor and assess global banking risks and promote the comprehensive and consistent implementation of Basel III. First, regularly collect and assess the implementation of Basel III by member economies. At present, about 1/3 of the member economies have implemented all or most of the rules of Basel III, 2/3 of the member economies plan to implement them by the end of 2024, and the rest of the economies will implement them in 2025. Second, analyze the causes of banking risk events in Europe and the United States in 2023, summarize the experience and lessons of risk response, and publicly release special reports. Third, focus on new risks such as crypto assets, climate-related financial risks and digital fraud. In 2023, the draft for comments on the climate-related financial risk disclosure framework, the bank crypto asset risk exposure standards, and the impact of digital fraud on banking supervision and financial stability will be released.
(VI) Improve the international regulatory framework for crypto assets
In recent years, crypto asset activities have become increasingly complex and the market has been volatile. Overall, the connection between crypto asset activities and systemically important financial institutions, core financial markets, and market infrastructure is limited, but as the application scenarios of crypto assets in payment and retail investment increase, crypto assets may cause risks in some economies. The FSB and relevant standard-setting bodies have jointly developed a global regulatory framework for crypto assets, which guides regulators to respond to financial stability risks related to crypto assets based on the principle of "same activities, same risks, same supervision". The IMF and the FSB have developed a regulatory policy roadmap to identify and respond to macroeconomic and financial stability risks of crypto assets. The roadmap sorts out the work related to the implementation of the regulatory policy framework for crypto assets, aiming to promote global information sharing and cooperation and fill the data gaps required for the rapid changes in the crypto asset ecosystem.
Column 16 Financial Stability Board Releases
International Regulatory Framework for Crypto Assets
In July 2023, the FSB released the International Regulatory Framework for Crypto Assets, proposing high-level regulatory recommendations for crypto assets and "global stablecoins" (Note 1), aiming to enhance the global consistency of regulatory approaches in the crypto asset industry, reduce regulatory loopholes, prevent regulatory arbitrage, and effectively prevent financial risks.
I. Two general principles for regulatory recommendations
The first is the principle of "same business, same risk, same regulation".If crypto assets and "global stablecoin" businesses have the same economic functions as traditional financial businesses and are accompanied by the same types of financial risks, they should comply with the same regulatory requirements.
The second is the principle of flexibility. Regulatory authorities of various economies can apply existing laws and regulations to the crypto-asset industry, or they can formulate new laws and regulations to implement the relevant regulatory recommendations.
Third, the principle of technology neutrality. Regulatory authorities of various economies should regulate based on the economic functions and risk characteristics of crypto-asset businesses, rather than their underlying technologies.
II. Contents of regulatory recommendations
The two regulatory recommendations put forward specific requirements for regulatory authorities, crypto-asset issuers and service providers (Note 2).
(I) "High-level Recommendations on Monitoring, Supervision and Regulation of Crypto-asset Businesses and Markets" (CA Recommendations)
The CA Recommendations contain a total of 9 high-level recommendations.
1. Regulatory powers and tools. Regulatory authorities should have appropriate regulatory powers, tools and sufficient resources to regulate crypto assets and be able to effectively enforce relevant laws and regulations.
2. Comprehensive supervision. Regulatory authorities should implement comprehensive supervision commensurate with the risks of crypto assets in accordance with the principle of "same business, same risk, same supervision". For example, formulate regulatory policies that match their risks, scale, complexity and systemic importance; evaluate whether the current regulatory measures can cope with the financial stability risks caused by crypto assets, and expand or adjust the scope of supervision as appropriate; unify the regulatory standards of the crypto asset market and the traditional financial market, and fully protect the interests of all relevant parties.
3. Cross-border cooperation, coordination and information sharing. Given the cross-border nature of crypto assets, regulatory authorities should fully consider their spillover risks, promote efficient communication, information sharing and consultation at home and abroad, and promote regulatory consistency.
4. Governance framework. Crypto-asset issuers and service providers should develop and disclose a comprehensive governance framework that matches their risk, scale, complexity, and systemic importance, as well as the financial stability risks they may bring, with clear accountability mechanisms and procedures for identifying, handling, and managing conflicts of interest.
5. Risk management. Crypto-asset issuers and service providers should establish an effective risk management framework that can identify, measure, assess, monitor, report, and manage all major risks; have a reputable management team that can effectively supervise compliance issues; establish emergency plans and business continuity plans (BCPs), comply with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protect customer assets, and reduce the risk of customer assets being damaged, misused, or unable to be redeemed on time.
6. Data management. Crypto-asset issuers and service providers should establish a comprehensive data management system: ensure the integrity and security of data, comply with relevant laws and regulations on data security; promptly correct erroneous data to ensure reliable data quality; be able to report relevant data information comprehensively, promptly, accurately and continuously; support cross-economy data sharing and enhance the public's understanding of crypto-assets.
7. Information disclosure. Crypto-asset issuers and service providers should fully disclose information. The disclosed information includes necessary information such as the risk characteristics of operations, transactions, management and products; terms of the custody relationship, safeguards for customer assets and the risk of custodian bankruptcy; major technical risks, such as cybersecurity risks and environmental climate risks.
8. Address financial stability risks caused by the connection between the crypto-asset ecosystem and the financial system. Regulators should effectively monitor the interconnections within the crypto-asset ecosystem and between the crypto-asset ecosystem and other financial systems to identify and resolve potential financial stability risks.
9. Comprehensively supervise multi-functional crypto-asset service providers. Regulatory authorities should require service providers to build an organizational management system that is consistent with their overall strategy and risk profile; when service providers fail to comply with existing regulations or have serious conflicts of interest, they should take effective measures in accordance with the law; closely guard against concentration risks and related-party transaction risks, and formulate additional prudential regulatory requirements when necessary; require cross-border service providers to share information to prevent risks from spreading overseas.
(II) High-level Recommendations on the Regulation of Global Stablecoins (GSC Recommendations)
The GSC Recommendations contain a total of 10 high-level recommendations. In addition to the seven requirements similar to the CA Recommendations, such as regulatory powers, governance frameworks, and risk management, three separate recommendations are also made.
1. Recovery and disposal plan.Global stablecoins should formulate appropriate recovery and disposal plans to support orderly liquidation or disposal within the legal framework and ensure that key functions and activities can be restored or continue to operate.
2. Redemption rights, stability and prudential requirements. Users should be provided with strong legal claims or guarantees against the issuer or underlying reserve assets of the "global stablecoin" and timely redemption should be guaranteed: the redemption procedures, redemption fees and claims should be explained to users, including how to ensure smooth redemption under stress scenarios; there should be reserve assets equal to the amount of stablecoins in circulation, and the reserve assets should be composed of high-quality and highly liquid assets that are uncollateralized, easy to cash out and not impaired. When the issuer goes bankrupt, the ownership of the reserve assets should be protected; comply with prudential requirements (including capital and liquidity requirements) and have sufficient liquidity to cope with capital outflows.
3. Regulatory requirements before operation. "Global stablecoins" should meet the market access requirements of the economy where they are located (such as licenses or registrations) before operation, and build the necessary products and systems to adapt to new regulatory requirements.
III. Work progress and future prospects
Follow up on the implementation of member policies. Track the main market and regulatory developments since the release of regulatory recommendations, and summarize the progress, experience, practices, problems and challenges faced by FSB members in implementing high-level regulatory recommendations on crypto assets and "global stablecoins".
Evaluate the effectiveness of the implementation of regulatory recommendations. By the end of 2025, work with relevant international organizations to evaluate the implementation of regulatory recommendations by member economies, ensure that regulatory recommendations are fully and consistently implemented, and determine whether it is necessary to update the recommendations.
Continue to study and improve regulatory policies. Study the potential financial risks of multi-functional crypto asset service providers and assess whether additional regulatory policies need to be formulated based on potential impacts.
Expand the scope of implementation and monitoring. Take measures with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations in non-FSB members and reduce the risk of regulatory arbitrage. Invite non-FSB member economies with significant cross-border crypto-asset businesses to join the relevant FSB working groups to expand the scope of cross-border monitoring of crypto-assets.
In the second part of "Chapter 5 Macroprudential Management" "Practices of Major Developed Economies", the Report elaborates on the United States' "response to crypto-asset-related risks" in improving its financial regulatory system.
II. Practices of Major Developed Economies
(I) United States
Improve the financial regulatory system. First, maintain the resilience of the banking system and respond to systemic financial risks. The U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have adopted policy measures such as citing the systemic risk exception clause to prudently deal with regional bank risks. During this period, the Federal Reserve established the Bank Term Funding Program (BTFP) to provide liquidity support to prevent the spread of risks in the financial system. Second, manage risks related to artificial intelligence (AI). The U.S. Congress pointed out that the application of artificial intelligence in financial services has become an emerging vulnerability in the financial system. In 2023, the National Institute of Standards and Technology (NIST) of the United States released an artificial intelligence risk management framework as a non-mandatory guidance document to explore AI-related risks and their management. Third, address risks related to crypto assets. In 2023, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the FDIC jointly issued a statement document on the management of crypto asset risks and liquidity risks in the crypto asset market of banking institutions. Fourth, address financial risks related to climate change. The Federal Reserve, the OCC and the FDIC jointly issued principles for the management of climate-related financial risks for large financial institutions.
Notes:
1: Global Stablecoins: Stablecoins that are widely used in multiple economies and may be systemically important in one or more economies.
2: Crypto-asset Issuers: Entities and individuals who create new crypto-assets in a centralized network. Crypto-asset Service Providers: Individuals and entities that conduct crypto-asset trading, lending, custody, market making, wallets and other businesses.
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