Compiled by the Oliver Wyman Forum
The global standard-setting body for securities regulators calls for urgent action to tighten and coordinate regulation of cryptoasset firms and markets, stablecoin issuer Tether announces plans to buy Bitcoin, and traditional financial institutions launch a blockchain-based network for tokenized assets. These are among the notable recent developments in the future of money.
IOSCO Calls For Rapid Tightening Of Regulation On Crypto
The International Organization of Securities Commissions (IOSCO) on May 23 proposed a comprehensive set of regulatory standards for cryptoasset issuers and markets with the aim of providing the same level of investor protection and market integrity as traditional financial markets.
The global standards body makes 18 recommendations in six areas, including combatting conflicts of interest stemming from vertical integration of activities as well as market manipulation, insider trading and fraud; ensuring safe custody and separation of client assets; requiring cryptoasset service providers to ensure retail investors are made aware of and deemed suitable to take on the risks of products offered; and increasing regulatory cooperation to address cross-border risks.
IOSCO noted that, because many crypto platforms engage in multiple functions such as brokerage, market-making, and proprietary trading, regulators might need to consider “measures such as legal disaggregation and separate registration” to contain conflicts of interest.
“What we would say to jurisdictions is just push ahead,” Martin Moloney, IOSCO secretary-general, told the Financial Times. “Just push ahead, do it to this standard as quickly as you can.” IOSCO is seeking public comments by the end of July and aims to finalize the recommendations by the end of this year.
BIS Affiliate Urges International Coordination On Crypto Rules
Policymakers should intensify efforts to regulate risks posed by cryptoassets before the size of crypto markets and their connection with the traditional financial system pose a threat of contagion, the Financial Stability Institute (FSI) said in a report published on May 17.
The report underscored the need for enhanced cooperation and coordination among international regulators to avoid gaps and regulatory arbitrage, as well as the difficulty regulators face in assessing and responding to risks in rapidly evolving crypto markets.
“Continuous efforts will be needed to understand novel business models and their underlying risks, to build or maintain the skills and capacity to adequately assess potential implications on financial markets, and to adjust policy responses promptly,” it said.
The report provided an overview of regulatory measures taken in 19 jurisdictions, including China, the European Union and several of its major member states, Japan, Switzerland, and the United States.
For centrally managed activities, regulatory initiatives focus mainly on issuers of stablecoins and security tokens, such as the EU’s Markets in Cryptoassets legislation, and the extension of anti-money- laundering and investor protection requirements to non-bank intermediaries. Efforts to address the risks posed by decentralized finance (DeFi) mostly involve analytical papers; only one of the 19 jurisdictions covered has issued guidance on the adoption of smart contracts that automatically execute transactions in DeFi protocols.
NY Fed, Singapore’s MAS Test DLT For Cross-Border Payments
The Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) on May 18 announced they had successfully tested the use of distributed ledger technology (DLT) to facilitate cross-border payments involving currencies that are not widely traded.
Under a project dubbed Cedar x Ubin+, which combines the names of the NY Fed’s and MAS’s respective DLT-based payments experiments, the two institutions used a type of smart contract to serve as a payments bridge between central bank currency ledgers employing different technologies. Large commercial banks with accounts at multiple central banks acted as intermediaries, and used so-called vehicle currencies — liquid major currencies including the US and Singapore dollars — to complete transactions between end users in countries with less liquid currencies.
The arrangement was able to settle simulated transactions atomically, meaning transactions were completed only if all legs of the payments chain were executed successfully. Payments were settled within 30 seconds on average, without the need for a central clearing authority.
World Bank Is Urged To Tokenize An Infrastructure Project
The World Bank should consider tokenizing an infrastructure project in an effort to tap new investors, increase liquidity in the asset class, and demonstrate leadership in the use of blockchain technology, according to a report by staff of the multinational lender.
Legal uncertainties and a lack of regulatory harmonization would prevent the bank from reaping blockchain’s full potential benefits of democratizing the ownership of infrastructure assets, making them more readily tradable, and improving the management of large projects, the report’s authors said. But they said tokenizing a project today could have the kind of catalytic effect the bank achieved with its first green bond, in 2008.
Tether Plans To Plow Share Of Profits Into Bitcoin
Tether Holdings, the company that runs the world’s largest stablecoin, on May 17 announced it would invest up to 15% of its net realized operating profit in bitcoin to bolster its reserves. The company made the announcement one week after reporting profit of almost $1.5 billion in the first quarter, implying it could purchase just over $220 million worth of bitcoin.
Tether, which is pegged to the US dollar, has seen its market capitalization grow by 25% this year to nearly $83 billion on May 23. Tether has lost its peg briefly on occasion, most recently after last year’s collapses of algorithmic stablecoin TerraUSD and the FTX exchange, and some critics have questioned whether it held adequate reserves.
In announcing its profit, the company published a consolidated reserve report prepared by BDO Italia stating it had $81.8 billion of assets on March 31, and liabilities of $79.4 billion, giving it excess reserves of almost $2.5 billion. Cash and cash equivalents, primarily US Treasury bills, made up nearly 85% of reserves; bitcoin accounted for $1.5 billion of reserves.
Institutions Launch Blockchain-based Trading Network
On May 9, more than two dozen financial institutions and technology provider Digital Asset announced plans to launch a privacy-enabled blockchain network for institutional assets.
The Canton Network, as the new system is called, will enable the firms to link assets, data, and cash on a single network, allowing them to carry out transactions instantaneously in an environment that’s safe and compliant with regulations. Firms including BNP Paribas, Deutsche Boerse, EquiLend, and Goldman Sachs already use the network.
FTX CEO’s Legal Billings Hint At Exchange’s Possible Reboot
John Ray III, the executive appointed to manage the bankruptcy of FTX, has been working on what appear to be efforts to revive the failed cryptocurrency exchange, Coindesk reported on May 23.
Expenses filed with the US Bankruptcy Court in Delaware show that Ray spent 6.7 hours in April on matters related to the structuring, restarting, and rebooting of FTX. The CEO was quoted in January as saying he would consider reviving the exchange “if there is a path forward.”
Binance Exits Canadian Market Over Regulatory Guidance
Binance will withdraw from the Canadian market because of recent guidance the country’s authorities have given about stablecoins and investor limits, the crypto exchange announced in a tweet on May 12.
In February, the Canadian Securities Administrators (CSA) provided guidance prohibiting crypto platforms from allowing customers to buy or deposit stablecoins without the CSA’s prior approval and banning the offering of margin or other forms of leverage. It cited recent insolvencies of crypto trading platforms for the restrictions.
The guidance “makes the Canada market no longer tenable,” Binance said, but it pledged to engage with regulators and hoped to reenter the market eventually.
Australia’s ASX Definitively Abandons Blockchain
A senior executive of Australian stock market operator ASX said the exchange will use conventional technology rather than blockchain to overhaul its 30-year-old trading software, Reuters reported on May 18.
In November, the exchange announced it would revisit its design solution and take a write-off of 250 million Australian dollars ($166 million) after an independent review criticized its six-year effort to develop a blockchain-based trading, clearing, and settlement platform as “lacking.”
Subsequently, executives suggested they might try to revive the blockchain project. But at a May 17 meeting with market participants, project director Tim Whiteley said the exchange “will need to use a more conventional technology than in the original solution in order to achieve the business outcomes.”
US Secret Service Holds Reddit Session On Crypto Crime
The US Secret Service’s San Francisco field office teamed up with a California task force, the Bay Area Regional Enforcement Allied Computer Team (REACT), to conduct an “ask me anything” forum to raise awareness about cryptocurrency crime on the community-based social media site Reddit, the Block reported on May 15.
The agencies underscored the growth of scams like pig butchering, in which criminals feign friendship or love interest to strike up an online relationship before swindling a victim out of money, typically through a bogus investment scheme.
“Preventing and educating someone from losing money in the first place is the best approach,” the Secret Service said in response to one question. It also said the best security for holding cryptocurrency safely was to use a hardware wallet bought directly from the manufacturer.
REACT said it had returned stolen funds to 17 victims in the past nine months. “The blockchain provides us with an amazing opportunity to track the flow of money,” it said.
Although best known for protecting the US President, the Secret Service was created in 1865 to combat counterfeiting and today investigates financial and cybercrimes. It launched a cryptocurrency awareness hub last year.