Efforts to regulate the fledgling crypto sector remain an inconsistent patchwork, leaving the global financial system exposed to systemic risks, according to a pair of reviews by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO).
The FSB issued a status report on the implementation of its 2023 framework for regulating crypto firms and stablecoins, which found that the adoption of its recommendations remains a work in progress.
In particular, the FSB found that few jurisdictions have developed regulatory frameworks for the crypto sector — and, “even where regulatory frameworks are finalized, full alignment with the FSB recommendations remains limited, especially with regard to stablecoin arrangements and crypto-asset service providers,” it noted.
Overall, the review concluded that, despite these initial efforts, there are “significant gaps and inconsistencies that could pose risks to financial stability and to the development of a resilient digital asset ecosystem.”
“Implementation progress remains incomplete, uneven and inconsistent. This creates opportunities for regulatory arbitrage and complicates oversight of the inherently global and evolving crypto-asset market,” said Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority and chair of the FSB team that prepared the report.
At the same time, IOSCO published its own report, reviewing the implementation of its recommendations for the crypto sector, which covers investor protection measures, conflicts of interest, fraud and market abuse, disclosure and governance.
Among other things, it warned that, “the fast-evolving crypto-asset ecosystem still harbours risks related to investor protection and market integrity.” It also called for global regulators to take action to address these risks and implement its policy recommendations as soon as possible.
In addition, the IOSCO report noted that existing mechanisms for sharing information across borders “remains relatively limited,” when it comes to the crypto sector, and it called for improved cross-border cooperation.
“Enhanced international cooperation is essential to address regulatory arbitrage and ensure consistent and coherent oversight,” said Matthew Long, co-chair of the IOSCO review and director, payments & digital assets, at the U.K. Financial Conduct Authority (FCA), in a release.
“Our report underscored the need for proactive information sharing across the regulatory lifecycle, including during authorization, supervision and enforcement stages,” he said.
Similarly, the FSB review called on policymakers and regulators to do more to reach full and consistent implementation of its recommendations, and it proposed measures for enhancing consistency, cross-border cooperation and coordination.