The FSB's Crypto-assets framework: What does it mean for firms?

The Financial Stability Board (FSB) has published its framework to monitor crypto-assets as part of its wider report to the G20 on work by the FSB and standard-setting bodies on crypto-assets. The report is provided at the request of the G20 Finance Ministers and Central Bank Governors, and will be discussed at their meeting on 21-22 July 2018.

The framework is aimed at helping the FSB monitor the crypto-asset universe for emerging financial stability risks. While there is some publicly available data, FSB monitoring will certainly mean increased supervisory focus on understanding exposure to crypto-assets at a firm-specific level for the traditional financial services sector, particularly for banks,. Given the nature of the FSB and other international standard setters as groupings of supervisors of the traditional financial services business constructs – banks, investment firms, insurers, etc. – it is hardly surprising that use is being made of this channel for data gathering.

Currently, the requests firms may receive may appear somewhat ad-hoc or adjunct in nature – for example, the Basel Committee on Banking Supervision (BCBS) is currently conducting what it describes as 'an initial stocktake' of institutional exposure to crypto-assets.  It is fair to predict that this will move to a more standardised and regular exercise – the report indicates that the  BCBS is considering including crypto-assets in its half-yearly exercise. It is also reasonable to assume that reporting templates will become more detailed over time as international standard setters further define their data needs, and as the crypto-assets universe continues to develop.

Taking a step back from the immediate matter of the imposition of more reporting requirements, it is worth considering how crypto-assets will come to be defined in the regulatory context. As with the post-crisis regulatory change, it is possible that the central bankers and capital markets/securities regulators may again be in conflict on approach. Crypto-assets have a chimeric quality; they may at times appear as clearly falling within the ambit of securities regulation, and at other times appear more akin to traditional payments instruments. Reflecting this, the report outlines the activity of three key stakeholders in addition to the FSB – the International Organization of Securities Commissions (IOSCO), the Committee on Payments and Market Infrastructure (CPMI), and the BCBS.  A global agreement on the scope of application of regulation to crypto-assets would certainly alleviate uncertainty for crypto-asset businesses, regulators, and investors, but such an accord is likely to take some time to reach. Throughout those negotiations, the nature of crypto-asset applications can be expected to continue to change.

As mentioned above, the report provides a helpful update from the FSB and other international standard setting bodies on their work in the emerging area of crypto-assets, including crypto-currency exchanges or platform and initial coin offerings (ICOs).

Below is a summary of the key updates on the work of various standard setting bodies:

FSB:

• The FSB has collaborated with the CPMI during the first half of 2018 to develop the framework for monitoring the financial stability risks posed by crypto-assets. This framework was approved by the FSB plenary in June 2018, and can be found in the annex to the report. Metrics include: basic market statistics; confidence effects (qualitative market intelligence gathering); wealth effects/market capitalisation; institutional exposures; payments and settlements; and comparators – comparisons of volatility and correlations between major crypto-currencies with other asset classes such as gold, currencies, equities.

CPMI

• Aside from a number of report which the CPMI has produced during the period from 2012 to 2018, the report highlights that the CPMI chairs the Economic Consultative Committee (ECC's) ad hoc working group on digital innovations which brings together chairs of innovation working groups from a number of other standard setters, including the FSB, International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS), etc.
• With IOSCO, the CPMI reviewed the Principles for Financial Markets Infrastructures (FMIs) in April 2018, and concluded that there were no critical issues or gaps for infrastructures based on distributed ledger technology (DLT).
• The CPMI will continue to engage with central banks, particularly to caution that they proceed with caution on Central Bank Digital Currencies (CBDCs). It will conduct a survey of central banks later in 2018; and conduct analysis focusing on the safety and efficiency considerations for wholesale digital currencies. Further work may include assessing the legal issues around holding and transferring digital currencies; and the cross-border implications of CBDCs.

IOSCO

• IOSCO has established an ICO Consultation Network as a forum for its members, and recently agreed to develop a Support Framework which could provide information to help supervisors to identify gaps in investor and market protections between ICOs and traditional securities offerings, and help to ensure consistent regulatory approaches.
• On crypto-asset platforms, IOSCO has indicated that it is seeking to work together with CPMI and BCBS on areas which lack clarity, e.g., where a crypto-asset platform may be more part of the payments infrastructure than akin to a securities ‎exchange.  IOSCO may also consider the issue of crypto-asset platform failures.

BCBS

• The BCBS is currently conducting an initial stocktake on the materiality of banks' direct and indirect exposures to crypto-assets. This may be followed up on in the BCBS's half-yearly Basel III monitoring exercise.
• It is conducting a stocktake of how supervisors are treating crypto-asset exposures as part of their domestic prudential regimes, and will consider whether to formally set out the prudential treatment of crypto-assets across credit risk, counterparty risk, market risk and liquidity risk.