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FTX collapse prompts the Financial Stability Board to focus on crypto regulation

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(Kitco News) - The collapse of FTX has done more to motivate global regulators to develop a framework for regulating cryptocurrencies than any previous event as the widespread promotion of the now-defunct exchange has made them appear to be neglecting their duties.

Most recently, the Financial Stability Board (FSB) – an international body that monitors and makes recommendations about the global financial system – met in Basel, Switzerland to discuss the outlook for global financial stability, which included a review of policy work related to crypto-assets and decentralized finance (DeFi).

According to the FSB, “the outlook for financial stability remains challenging,” especially due to the “record high levels of debt across non-financial sectors, including rising debt servicing costs as maturing debt is refinanced at higher rates.”

When it comes to cryptocurrencies, the FSB focused on developments that have arisen following the failure of FTX, which have devastated the crypto market but had little effect on the wider financial market as of yet.

“While financial stability risks to date from crypto-asset market turmoil remain limited, growing linkages of crypto-asset firms with core financial markets and institutions increase the risk of spillovers,” the FSB Said. “Crypto trading platforms, combining multiple activities that are normally separated in traditional finance, can lead to concentrations of risk, conflicts of interest, and a misuse of client assets.”

This led the board to emphasize the importance of establishing a global framework of regulation and supervision of the crypto industry.

On the topic of DeFi, the FSB noted the “fast-growing” nature of the sector which covers a “variety of services in crypto-asset markets that aim to replicate some functions of the traditional financial system.”

The committee discussed the financial stability implications of DeFi and agreed on the need to enhance its crypto-assets monitoring framework to include DeFi-specific vulnerabilities and “explore approaches to fill data gaps to measure and monitor interconnectedness of DeFi with traditional finance, with the real economy and with the crypto-asset ecosystem.”

U.K. Parliament looks to increase its regulation of foreign crypto entities in the wake of the FTX collapse

Turning to cryptos in emerging markets and developing economies (EMDEs), the FSB noted that “the trend towards digitalization of financial services continues apace, particularly in EMDEs.”

According to the board, “crypto-assets could raise particular challenges in some EMDEs relating to issues such as monetary policy, not least through a risk of currency substitution, and capital flow management.”

This prompted members to recognize the need for further analysis of these and other macro-financial implications of crypto-assets. As a result, the topic of advancing work on the global regulatory and supervisory framework for crypto-asset markets and activities was added to the FSB’s work program for 2023.

Only time will tell if this is the actual bottom, but the increase in miner revenue is cause for hope. As Glassnode noted, “Of most interest is whether this uptick is fleeting, or whether it can be sustained, signifying a potential regime shift is underway.”

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