The People's Bank of China (PBOC) recently released its "China Financial Stability Report (2024)," which includes extensive discussions on global cryptocurrency regulatory developments and particularly emphasizes Hong Kong's advancements in crypto compliance.
Global Regulatory Landscape for Crypto Assets
Following the market turbulence of 2022, cryptocurrency prices and trading volumes rebounded significantly in 2023. By the end of the year, the global market capitalization of crypto assets reached $1.55 trillion, marking a 10.71% year-on-year increase. Recognizing the potential spillover risks that crypto assets pose to financial system stability, regulators worldwide have intensified their oversight efforts. Currently, 51 countries and regions have implemented prohibitive regulations on crypto assets, with several economies adjusting existing laws or enacting new legislation to establish clearer frameworks.
In the United States, regulatory actions have been based on existing securities laws. The Securities and Exchange Commission (SEC) denied over 20 applications for spot Bitcoin ETFs between 2018 and 2023. Although the SEC approved spot Bitcoin ETFs in January 2024, its chair emphasized that this does not constitute an endorsement of Bitcoin, urging investors to remain cautious about risks associated with Bitcoin and crypto-linked products.
The European Union has approved the Markets in Crypto-Assets (MiCA) regulation, establishing the world's first comprehensive and clear regulatory framework for virtual assets. This legislation is scheduled to take full effect by the end of 2024.
The United Kingdom has accelerated its virtual asset legislation by enacting the Financial Services and Markets Act, which brings crypto assets within its regulatory scope.
Singapore has introduced a regulatory framework for stablecoins, specifying the types of stablecoins subject to regulation and the conditions for issuers.
Japan has revised its Payment Services Act to restrict stablecoin issuance to licensed banks, registered money transfer agents, and trust companies.
Hong Kong's Approach to Crypto Asset Regulation
Hong Kong has adopted a proactive approach by categorizing virtual assets into two types for regulatory purposes: security tokens and non-security tokens. The region implements a distinctive "dual licensing" system for virtual asset trading platform operators. Security tokens fall under the Securities and Futures Ordinance and its licensing regime, while non-security tokens are regulated under the Anti-Money Laundering Ordinance. Institutions engaged in virtual asset activities must obtain the relevant licenses from regulatory authorities to operate legally.
Additionally, major financial institutions such as HSBC and Standard Chartered Bank are required to incorporate crypto asset exchanges into their routine customer due diligence and monitoring processes.
Macroprudential Management and Crypto Assets
The report notes that crypto asset activities have grown increasingly complex and volatile. While the current linkages between crypto assets and systemically important financial institutions, core financial markets, and market infrastructures remain limited, the expanding use of crypto assets in payments and retail investment could pose risks in some economies.
The Financial Stability Board (FSB), in collaboration with other standard-setting bodies, has developed a global regulatory framework for crypto assets. This framework is guided by the principle of "same activity, same risk, same regulation," aiming to help regulators address financial stability risks associated with crypto assets.
The International Monetary Fund (IMF) and FSB have jointly formulated a policy roadmap to identify and mitigate macroeconomic and financial stability risks stemming from crypto assets. This roadmap organizes work related to implementing regulatory policy frameworks and aims to foster global information sharing and cooperation to address data gaps arising from the rapidly evolving crypto asset ecosystem.
FSB's International Regulatory Framework for Crypto Assets
In July 2023, the FSB released an international regulatory framework for crypto assets, proposing high-level recommendations for crypto assets and "global stablecoins." The goal is to enhance global consistency in regulatory approaches, reduce regulatory gaps, prevent arbitrage, and effectively mitigate financial risks.
Core Principles of the Regulatory Recommendations
- Same Activity, Same Risk, Same Regulation: Crypto assets and global stablecoins should be subject to the same regulatory requirements as traditional financial activities if they perform similar economic functions and entail comparable risks.
- Flexibility: Regulatory authorities may apply existing laws and regulations to the crypto asset industry or develop new ones to implement the recommendations.
- Technology Neutrality: Regulation should be based on the economic functions and risk profiles of crypto asset activities, not their underlying technology.
Key Components of the Recommendations
The framework consists of two sets of recommendations targeting regulators, crypto asset issuers, and service providers.
High-Level Recommendations for Crypto Asset Activities and Markets (CA Recommendations)
The CA Recommendations comprise nine key points:
- Regulatory Authority and Tools: Regulators should possess adequate powers, tools, and resources to supervise crypto assets and enforce laws effectively.
- Comprehensive Oversight: Regulatory measures should be proportionate to the risks of crypto assets, applying the "same activity, same risk, same regulation" principle. Policies should match the risk, scale, complexity, and systemic importance of the activities.
- Cross-Border Cooperation: Given the cross-border nature of crypto assets, regulators should facilitate efficient communication, information sharing, and consultation to promote regulatory consistency.
- Governance Framework: Issuers and service providers must establish and disclose comprehensive governance frameworks with clear accountability and conflict-of-interest management procedures.
- Risk Management: Effective risk management frameworks are essential, covering identification, assessment, monitoring, and reporting of all significant risks. This includes compliance oversight, contingency plans, business continuity planning, adherence to FATF anti-money laundering standards, and safeguarding client assets.
- Data Management: Robust data management systems must ensure data integrity, security, and quality. Timely and accurate reporting and support for cross-jurisdiction data sharing are required.
- Disclosure: Transparent disclosure of operational, transactional, managerial, and risk-related information is mandatory. This includes details on custody arrangements, client asset protections, and technical risks like cybersecurity and environmental impacts.
- Addressing Interconnections: Regulators should monitor linkages within the crypto ecosystem and between crypto and traditional finance to identify and mitigate potential stability risks.
- Supervising Multi-Function Service Providers: Service providers must have organizational structures aligned with their overall strategy and risk profile. Regulators should take strong actions against non-compliance and monitor concentration and transactional risks.
High-Level Recommendations for Global Stablecoins (GSC Recommendations)
The GSC Recommendations include ten items, adding three specific requirements beyond those in the CA Recommendations:
- Recovery and Resolution Plans: Global stablecoins must have credible recovery and resolution plans to ensure orderly wind-down or restructuring and continuity of critical functions.
- Redemption Rights, Stability, and Prudential Requirements: Users must have strong legal claims or safeguards regarding the issuer or reserve assets, ensuring timely redemption. Reserves should be sufficient, high-quality, and liquid. Prudential requirements like capital and liquidity must be met to handle outflows.
- Pre-Operational Requirements: Global stablecoins must meet market access requirements (e.g., licensing or registration) and have necessary systems in place before commencing operations.
Future Work and Outlook
The FSB will monitor the implementation of these policies by members, track market and regulatory developments, and summarize progress, experiences, and challenges in applying the high-level recommendations.
By the end of 2025, the FSB, in cooperation with relevant international organizations, will assess the implementation of these recommendations across member economies to ensure comprehensive and consistent application and determine if updates are needed.
Ongoing research will focus on potential financial risks from multi-function crypto asset service providers and whether additional regulatory measures are necessary.
Efforts will also extend to promoting the implementation of recommendations in non-FSB member jurisdictions to reduce regulatory arbitrage risks. Non-member economies with significant cross-border crypto asset activities may be invited to join FSB working groups to broaden the scope of cross-border monitoring.
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Frequently Asked Questions
What is the main focus of PBOC's 2024 report on crypto assets?
The report provides an overview of global regulatory trends, details specific approaches by major economies, and highlights Hong Kong's progressive licensing system for virtual asset service providers. It emphasizes mitigating financial stability risks through international cooperation.
How does Hong Kong regulate cryptocurrency exchanges?
Hong Kong uses a "dual licensing" system. Platforms trading security tokens require a license under the Securities and Futures Ordinance, while those handling non-security tokens must comply with the Anti-Money Laundering Ordinance. All operators must be registered.
What are the core principles of the FSB's crypto regulatory framework?
The framework is built on three principles: "same activity, same risk, same regulation"; flexibility for regulators to use existing or new laws; and technology neutrality, focusing on economic function rather than the technology itself.
Why is global coordination important in crypto regulation?
Due to the inherently cross-border nature of crypto assets, coordinated regulation helps prevent regulatory arbitrage, ensures consistent oversight, and manages potential spillover risks that could affect global financial stability.
What are the specific requirements for global stablecoin issuers?
Issuers must hold high-quality, liquid reserve assets equal to the stablecoins in circulation, ensure users have clear redemption rights, and have robust recovery plans. They must also meet pre-operational licensing and prudential requirements.
How will the effectiveness of these new regulations be measured?
The FSB, along with other international bodies, will conduct an assessment of implementation across member economies by the end of 2025 to evaluate consistency and effectiveness and decide if the recommendations need updating.