International Monetary Fund (IMF) Deputy Managing Director Bo Li and Nobuyasu Sugimoto; IMF's deputy Division chief of Financial Supervision and Regulation Division, Monetary & Capital Markets Department; recently wrote in an IMF blog post that global cooperation to enact targeted regulations is needed to address concerns surrounding the crypto industry.
Other prominent figures who have recently emphasized the need for global cooperation in the crypto sector include Wharton professor Kevin Werbach and Changpeng Zhao (CZ), CEO and founder of Binance, the world's largest cryptocurrency exchange.
"The already volatile world of crypto has been upended anew by the collapse of one its largest platforms, which highlighted risks from crypto assets that lack basic protections," Li and Sugimoto said in the post. "And with growing and deeper links with the core financial system, there could also be concerns about systemic risk and financial stability in the near future. Many of these concerns can be addressed by strengthening financial regulation and supervision, and by developing global standards that can be implemented consistently by national regulatory authorities."
Li and Sugimoto noted that the recent market failures of crypto exchanges and crypto-focused hedge funds have sparked concerns about crypto's market integrity and the protection of crypto customers. The authors presented five recommendations to address those concerns and enact more coordinated regulation of the crypto sector without crippling innovation. The first recommendation is to require licensing, registration and authorization of crypto asset service providers, which would include entities that provide storage and custody services. These rules could be modeled from traditional finance regulations.
The second recommendation is that "entities carrying out multiple functions should be subject to additional prudential requirements," especially transparency and disclosure requirements, in part to identify potential conflicts of interest that could be prohibited.
The third recommendation is that stablecoin issuers be subjected to "strong, bank-type" requirements and regulations, especially as stablecoins become more widely accepted outside of crypto users.
The authors' fourth recommendation is to establish requirements on regulated financial institutions that engage with the crypto sector, citing the Basel Committee on Banking Supervision's recently announced standards as an example.
The fifth recommendation is "robust, comprehensive, globally consistent crypto regulation and supervision." The authors stressed that disjointed approaches by different countries limit the effectiveness of regulation due to crypto's decentralized nature; saying, "For a global approach to work, it must also be able to adapt to a changing landscape and risk outlook."
Li and Sugimoto concluded by advocating for targeted restrictions as opposed to broadly enacted bans.
"For its part, the IMF will continue to work with global bodies and member nations to help leading policy makers working on this topic to best serve individual users as well as the global financial system," they said in the post.
The Basel Committee on Banking Supervision proposed prudential standards intended to regulate banks' exposure to crypto assets and mitigate risks, and the standards were endorsed on Dec. 16 by the Group of Central Bank Governors and Heads of Supervision (GHOS), the committee's oversight body; a Bank for International Settlements (BIS) release said. The Basel Committee is a global standard setter for bank regulation.
"The Committee's standard on cryptoasset is a further example of our commitment, willingness and ability to act in a globally coordinated way to mitigate emerging financial stability risks," Pablo Hernández de Cos, chair of the Basel Committee and governor of the Bank of Spain, said in a statement included in the release. "The Committee's work programme for 2023–24 endorsed by GHOS today seeks to further strengthen the regulation, supervision and practices of banks worldwide."
Werbach, who focuses on business ethics and legal studies, noted that uncertainty over which entities have jurisdiction to regulate the crypto sector means there is a need for international coordination to ensure that certain countries do not become havens; a Knowledge at Wharton report said.
"Regulatory clarity is needed ASAP,” Binance's CZ said in a recent tweet. "I have said this before and will say it again: the best form of user protection is globally consistent, risk-based regulation. Outright bans will just lead to users operating in the shadows, at their own risk, and without any safety net…User protection and market integrity are enhanced when lawmakers and regulators expand the scope of permissible activities. We have seen this in many other industries: tradfi, health care, pharma, internet, content, etc.”