20 juin 2019 Harry Eddis  -  Richard Hay  -  Sophia Le Vesconte FintechLinks

Global regulators need to coordinate, think outside the box and broaden the dialogue on decentralised financial technologies and cryptoassets

In the run up to this year’s G20 Summit, three new reports have come out from international bodies around decentralised financial technologies, cryptoassets and cryptoasset trading platforms. We look at some of the underlying messages for national regulators, which may be broadly indicative of the global direction of travel.

Three new reports

The following reports (among others) were presented to, and welcomed by, the G20 Finance Ministers and Central Bank Governors at their ministerial meeting ahead of the 2019 G20 Summit:

Three key messages for regulators

The reports cover an array of interesting market analysis and guidance for regulators. Emerging from them are three underlying messages for regulators that may give us a sense of the broad trajectory of global crypto and DLT regulation.

1. Coordinate globally

One clear theme is the recognition that further coordination among national regulators is essential to managing effectively the risks posed by cryptoassets and decentralised financial technologies.

In particular, the novel characteristics of cryptoassets, together with the differing policy objectives of governments, have resulted in a range of regulatory approaches to token issuances and secondary trading. Given the nature of these markets – e.g. that they are often designed to cross borders and circumvent regulatory control – there is real potential for gaps, overlaps and/or conflicts between different regimes.

Against that backdrop: 

  • In relation to cryptoassets generally, FSB members have agreed to be more forward-looking in their risk assessments – e.g. to identify trends that may lead to global financial stability and to assess their potential significance early on. The FSB acknowledges that: “authorities will need to balance the case for multilateral action to facilitate a coherent response on the one hand, with an acknowledgement of differences among jurisdictions’ legal frameworks and the fast-moving state of this technology on the other”. 
  • In relation to cryptoasset trading platforms, IOSCO members have agreed to cooperate in developing internationally recognised and consistent standards of regulation, oversight and enforcement, and to enhance information exchange.

2. Think outside the box

Another consistent theme is the message that regulators may need to challenge a technology-neutral approach to regulation and consider more tailored and creative solutions for these new markets.

For example: 

  • Services that use decentralised financial technologies, and which are difficult to link to specific entities and/or jurisdictions, may necessitate a shift away from an entity-based approach to regulation, in favour of an activity-based approach. 
  • Whilst cryptoasset trading platforms are in some ways similar to traditional trading venues, and can be regulated as such, they often have unique structural features that warrant a novel regulatory approach. The IOSCO report provides a detailed analysis of these features, which include things like direct access to retail customers, provision of custody services and performance of activities that cause new types of conflicts of interest (such as market making and proprietary trading against users). 
  • The pervasive use of technology in these markets may enable some jurisdictions to consider new ways of administering or enforcing regulation – for example by embedding restrictions in computer code. Analysis of new sources of data may also provide supervisors with greater and timelier insights into potential systemic risks.

3. Broaden the dialogue with all stakeholders

The FSB also encouraged regulators to broaden the dialogue with all stakeholders in decentralised financial technologies – and this message was specifically endorsed by the G20 leaders.

The FSB noted that engaging with software developers, the engineering community, businesses, academia, investors, consumers and users, among others, may help regulators better assess the risks and opportunities presented by decentralised financial technologies.

Next steps

The reports provide plenty of food for thought for national regulators.

The IOSCO report on cryptoasset trading platforms takes the form of a consultation, and is open for public comment on the issues identified and guidance offered until 29 July 2019.

The G20 leaders have asked the FSB and standard setting bodies to continue to monitor risks and consider work on additional multilateral responses as needed.

The leaders also affirmed their commitment to applying the recently amended anti-money laundering and counter terrorism standards of the Financial Action Taskforce to virtual assets and related providers. The UK has already been consulting on the implementation of these standards.