The collapse of FTX, the world’s third-largest crypto exchange, points to the urgent need for a coordinated global approach to regulation considering crypto assets are fast emerging as an alternative asset class.
The FTX collapse and subsequent drop in the prices of Bitcoin, Ethereum, and other major crypto assets, has prompted renewed calls for greater consumer protection and regulation of the crypto industry.
Regulating a highly volatile and decentralised system remains a challenge, considering the cross-border nature of crypto transactions.
The underlying concern revolves around linkages of crypto exchanges to the regulated financial system with the attendant financial stability and potentially systemic risks, the integrity of disclosures, and liquidity crises when a run occurs.
The anonymity of crypto assets could also facilitate money laundering and terrorism financing. Although authorities may be able to trace illicit transactions, they may not be able to identify the parties to such transactions.
According to the International Monetary Fund (IMF), in emerging markets and developing economies, the advent of crypto could accelerate “cryptoisation”—when these assets replace domestic currency, bypassing foreign exchange restrictions and capital account management measures.
Such risks underscore the need for comprehensive international standards to address risks to the financial system from crypto assets, associated ecosystems, and related transactions while allowing for an enabling environment for useful crypto asset products and applications.
The IMF recommends that the Financial Stability Board develops a global framework of standards for the regulation of crypto assets to provide a coordinated approach to managing financial stability and market conduct risks that can be consistently applied across jurisdictions.
Authorities should provide clear requirements for regulated financial institutions concerning their exposure to and engagement with crypto.
For example, the appropriate banking, securities, insurance, and pension regulators should stipulate the capital and liquidity requirements and limits on exposure to different types of these assets, and require investor suitability and risk assessments.
If the regulated entities provide custody services, requirements to address the risks arising from those functions should be set out.
Emerging markets and developing economies face more immediate risks of currency substitution through crypto assets, which pose capital account management risks in the face of cryptoization.
There is also an urgent need for cross-border collaboration and cooperation to address the technological, legal, regulatory, and supervisory challenges.
Mr Karanja is the CEO, Scopes Markets Kenya ; [email protected]