Crypto market 'turmoil' prompts tighter regulation, says watchdog FSB

Banks looking to deepen their crypto offerings may need to bolster their compliance, accounting and governance protocols, according to recently proposed recommendations from the Financial Stability Board.

The FSB, a Basel, Switzerland-based entity that coordinates with financial regulators globally, released proposed frameworks for crypto-asset and stablecoin regulation as a bleeding crypto market exacerbates a lack of regulation transparency and mismatches of liquidity and maturity. 

"This turmoil has once more underlined the need for a comprehensive approach to crypto-asset regulation," FSB Chair Klaas Knott said in a letter released with the reports. "The current 'crypto winter' has reinforced our assessment of existing structural vulnerabilities in these markets. … These recommendations seek to promote the comprehensiveness and international consistency of regulatory and supervisory approaches."

The FSB proposed nine crypto-asset recommendations that would require banks and other companies to implement more stringent, clear risk management protocols to digital assets, commensurate to the risks they pose. It also recommends the separation of services like trading, lending and custody into several entities. 

Stablecoins, cryptocurrencies tied to another asset like the U.S dollar or gold, will see a watershed if the FSB's ten recommendations for the currency are approved. The Swiss board's report said most existing stablecoins wouldn't meet the new recommendations due to their governance, risk management, redemption rights, stabilization mechanisms and disclosures.

Earlier this year, the FSB warned that the lack of regulation in crypto markets could pose a threat to the health of the global economy, but it walked back some of those concerns in its latest report. The board took the position that the interconnectedness of the crypto market could cause a chain reaction of stress among market participants.

The crash of the stablecoin TerraUSD, bankruptcies of the crypto lenders Celsius and Voyager and the rapid decline of bitcoin and ethereum values this year have led other major regulators besides the FSB to caution involvement with crypto.

The G-20 finance ministers and central bank governors are reviewing the recommendations this week, and a public consultation period is open until Dec. 15. FSB plans to finalize recommendations by July 2023 and begin reviewing implementation in 2025. The FSB doesn't have legal mandate or enforcement authority, and relies on peer pressure to administer policies.

The FSB's published works reflect agreement among its members, which represent financial regulators across the globe, including the Securities and Exchange Commission, the Federal Reserve and the U.S. Treasury. The U.S.-based Commodity Futures Trading Commission and the Office of the Comptroller of the Currency contributed to FSB's crypto policy work.

The Fed's vice chair for supervision, Michael Barr, said in a Wednesday speech that banks should be cautious about taking deposits from crypto firms due to current volatility in the space. 

"Many of these activities pose novel risks," he said at a DC Fintech Week event, "and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks."

The lack of crypto regulation in the U.S. has delayed banks' involvement in crypto offerings. Barr added at the event that the Fed is working with the Federal Deposit Insurance Corp. and OCC on regulations.

Earlier this summer, Richard Rosenthal, Deloitte's digital-assets banking regulatory practice lead and principal, told American Banker that many banks were holding off on crypto plans until the OCC or FDIC issued more specific guidance.

However, some major financial institutions are staying the course. BNY Mellon announced this week that it had launched its digital assets custody platform, and Nasdaq announced last month its plan to enter the space next year. In March, the SEC issued Staff Accounting Bulletin No. 121, requiring institutions that custody crypto assets for their clients to list that risk as a liability on their balance sheets.