Today, the Financial Stability Board (FSB) released updated versions of its G20 high-level recommendations to regulate crypto assets and global stablecoins. He updated three areas of his proposals, including crypto custody, conflicts of interest, and cross-border cooperation of regulators. The international body remains concerned about the interconnection between traditional finance (TradFi) and the cryptocurrency sector.

Regarding the interconnection with TradFi, he pointed to the closure of Silvergate bank as a result of massive withdrawals by crypto companies without mentioning names. In Signature’s case, he said that cryptocurrencies “may have contributed to the failure.” He also mentioned the temporary de-pegging of a stablecoin following the failure of a regional bank, a reference to the USDC reserves held at Silicon Valley Bank.

Focus of Cryptocurrency and Stablecoin Recommendations

Following these and the continuing revelations about the FTX collapse, the updated recommendations fall into three areas.

The first approach is crypto custody, where service providers must avoid mixing customer assets with their own funds. In particular, property rights must be safeguarded, even in the event of the insolvency of the service provider. Unfortunately, the last year or so has proven otherwise.

Second, we have already seen several examples of conflicts of interest where a service provider combines multiple functions that would normally be in separate legal entities in TradFi. More than that, entities lack transparency and can set up complex structures to finance each other. Local regulators should institute regulation and supervision to deal with these conflicts.

The third area relates to cross-border cooperation between regulators to address crypto asset issuers and service providers migrating to lighter regulatory or supervisory jurisdictions. The FSB wants to see better information sharing between countries.

Banks want exclusion, unhosted wallets get attention

One of today’s posts included comments on the cryptocurrency consultation that began last October. The definition of crypto assets is very broad. Therefore, banks are willing to distinguish bank-issued tokenized deposits from crypto assets, because they are already subject to extensive regulation. Based on today’s posts, this doesn’t seem to have been taken into account.

The consultation explores the risks of crypto assets. Two prominent areas included substantial liquidity risks as well as wallets. Judging by the mentions in the inquiry report, wallets could be an area that will receive more attention. The risk of private wallets that are not subject to regulation was one area mentioned. But non-hosted wallets garnered more attention, with some respondents arguing that they should not be considered intermediaries.

Meanwhile, the FSB will combine the latest recommendations with the IMF’s work and deliver it to the G20 in September.