Crypto will soon threaten global financial stability, FSB official says

Recent market turmoil has given the Financial Stability Board (FSB) “all the more reason” to develop a globally consistent regulatory framework, an official said on Thursday.

The international body monitors and recommends standards for the global financial system, and is made up of major economies and institutions like the International Monetary Fund (IMF).

Rapid growth of crypto markets in the presence of structural vulnerabilities and incomplete regulations and supervision means that they will “soon reach a point where they represent a threat to the stability of the global financial system,” said Steven Maijoor, who is the chair of the FSB's working group on crypto assets.

Maijoor made the comments at the Institutional Digital Assets and Crypto Regulation Symposium organized by City & Financial Global in London.

Regulators worldwide – who were already looking into increasing supervision of crypto after the market fallout from earlier this year – are now exploring tighter requirements with renewed urgency following the collapse of multi-billion dollar cryptocurrency exchange FTX last week.

FSB was already looking to set up global standards for regulating crypto, with its annual report published Wednesday, echoing Maijoor’s worries about it potentially threatening financial stability. The report said a number of crypto’s structural vulnerabilities are similar to those in traditional financial markets.

“Trust is built in drops, and lost in buckets,” Maijoor said, drawing parallels between crypto asset markets and the downfall of the Bank of Amsterdam three centuries ago, saying that “it is the FSB’s goal to learn from the past.”

Maijoor, who is an executive board member of the central bank of the Netherlands and a member of the European Central Bank's supervisory board, said that many crypto markets are characterized by high levels of information asymmetry, making it often impossible to know which actors have bad intentions and which platforms are at risk of overreach.

He also said that “crypto cannot simply be considered a fad,” and that many crypto activities do not comply with existing regulation or take place outside of the regulatory perimeter.

The cross border nature of crypto assets poses an obvious challenge for national supervisors,” Maijoor said, adding that they require regulatory response coordinated across borders which is “exactly what the FSB is working on.”

The FSB has published reports open to public consultation, which call on jurisdictions globally to develop new financial norms for crypto risks, focus on international regulation and tighten rules for stablecoins.

He noted that financial supervision is often organized across different sectoral authorities and that the FSB has issued high level recommendations which urge authorities to move beyond sectoral boundaries.

While the FSB has focused on financial stability, Maijoor said that widespread fraud and malicious behavior should also be on regulators’ agendas.

“Crypto activities in many ways resemble the activities of traditional finance,” he said, saying that these activities should be regulated on the principle of “same activity, same risk.”