After European regulations MiCA and TFR, who more strictly regulate cryptocurrencies, Web3 has nothing to do with regulators. As the High Council for Financial Stability (HCSF) recalls in its 2022 annual report, published on 25 October, the next wave of regulations should come from international bodies: the Financial Stability Council (CSF or FSB in English) and the Committee of Basel which brings together governors and supervisors of central banks from 27 countries and sets the prudential rules for the sector.
No systemic risk … but still
In its report, the HCSF, which monitors the systemic risk of the financial sector in France, looked at the cryptocurrency market. Concludes that the sector “does not seem to represent at this stage systemic riskdue to its relatively small size and weak interconnections with traditional finance “. However, he observes a “lack of reliable data” And “the growth of channels of contagion due to the growing interest of traditional investors”which lead him to believe that a “We need coordinated regulation at an international level”.
These contagion channels are the development of cryptocurrency settlement services by major players in the payments industry (Visa, MasterCard…) and investments such as cryptocurrency indexed ETFs, the creation of crypto derivatives and the composition of reserves that serve as support for some stablecoins, other than US Treasury bills.
The HCSF also emphasizes the multiplicity of risks associated with these markets: volatility, leveraged products, lack of transparencycomplexity for the uninitiated, governance of DAOs (decentralized autonomous organizations), security breaches, hacksanonymity of transactions, etc.
“Same risks, same rules”
This internationally coordinated regulation is currently under development. The FSB released on 11 Octoberregulatory framework for cryptocurrencies, based on the principle “same activities, same risks, same rules” : the idea is to regulate traditional finance and cryptocurrencies in the same way, as long as intermediaries and products perform the same function. This proposal also affects stablecoins, these cryptocurrencies backed by currencies. It is open for consultation until 15 December.
“Cryptocurrency markets are evolving rapidly and may reach a point where they pose a threat to global financial stability due to their size, structural vulnerabilities and growing interdependencies with the traditional financial system.”observes the FSB.
Strengthened prudential rules for banks
For its part, the Basel Committee on Banking Supervision was opened on 30 June 2022 aon its proposals for the prudential treatment of cryptocurrencies for banks, the first version of which was released in June 2021. The regulatory framework is expected to be adopted by the end of the year.
It should impose higher prudential requirements on banks exposed to cryptocurrencies (the required capital must be set aside in proportion to the exposure), especially for cryptocurrencies and stablecoins whose stabilization mechanisms are not deemed satisfactory. For riskier assets, banks should have a capital requirement equivalent to the amounts disclosed in order to absorb all potential losses.
The response of the players in the financial world to this consultation boils down, roughly, to the request for a regulatory framework that is not too restrictive for banks, at the risk that they will not be able to grasp the potential of the sector.
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