Global financial watchdog to step up crypto regulation amid market turmoil

11 Jul , 2022 By : Kanchan Joshi

Amid a recent turmoil in markets, the Financial Stability Board on Monday said that it will propose global rules for the cryptocurrency sector. The FSB said the current turmoil has highlighted the need to make progress on regulating cryptocurrencies.

"The FSB will report to the G20 Finance Ministers and Central Bank Governors in October on regulatory and supervisory approaches to stablecoins and other crypto-assets," the FSB, a body of regulators, treasury officials and central bankers from G20 countries, said in a statement.

Meanwhile, Federal Reserve Vice Chair Lael Brainard has said that the recent turmoil in the crypto market does not yet pose a “systemic risk" to the broader financial system, but authorities need to close regulatory gaps to protect consumers and ensure stability.

Fed officials are closely monitoring the turbulence in crypto assets, which has exposed vulnerabilities related to leverage, liquidity and settlement, Brainard told a Bank of England conference Friday, according to her prepared remarks.

“Despite significant investor losses, the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk," Brainard further stated.

“This is the right time to establish which crypto activities are permissible for regulated entities and under what constraints so that spillovers to the core financial system remain well contained."

The crypto universe continues to be plagued by wild swings, with the price of Bitcoin dropping by as much as 75% from a record high over the past seven months, the Fed official said. Some stablecoins, or digital assets pegged to a fiat currency, have faced significant outflows and are vulnerable to runs, she said.

Brainard called attention to the spillover risks of stablecoins, which are regularly used as collateral for transactions. A central bank digital currency, which would be issued and backed by the government, could provide a safe alternative and “enhance stability," she said.

While the Fed is researching the pros and cons of developing a digital currency, central bank officials have not made a decision on whether to create one, saying they would prefer for the decision to be made by Congress.