Klaas Knot: The need for regulating crypto-assets - a global effort
Speech (virtually) by Mr Klaas Knot, President of the Netherlands Bank and Chair of the
Financial Stability Board, at the Asia Securities Industry & Financial Markets
Association (ASIFMA) Annual Conference, Hong Kong, 29 February 2024.
* * *
Thank you for inviting me to speak today. I am sorry that I cannot be there with you in
person. But nevertheless, I am grateful for the chance to speak about a topic that is not
for the faint-hearted: crypto-assets. As some of you who've invested in Bitcoin know,
the price curve has gone through some steep inclines and quick descents the past
couple of years. And it is not just the price of Bitcoin that resembles a rollercoaster. The
crypto-ecosystem itself also continues to evolve rapidly and in different directions. It is
not just some retail investors that are 'dipping their toes' into crypto - large institutional
parties continue to show serious interest in crypto-assets and its underlying
technologies.
In its role as 'guardian' of global financial stability, the FSB has been closely monitoring
crypto-asset markets since 2018. While we have been working hard to address crypto's
potentially systemic implications, we do recognize the possible benefits of this
innovation. In our opinion, effective regulation should create the right conditions for
innovation to unfold in a responsible manner. Being technology neutral forms a guiding
principle of the FSB's recommendations.
In recent years we have for example seen the potential benefits of distributed ledger
technology. We have also seen that these benefits will not be realized without the
comprehensive regulation of financial activities built on top of this technology.
For the FSB, supporting effective regulation of crypto-assets has so far meant
addressing the risks related to it. Since 2018 we have repeatedly expressed concern
about the risks associated with crypto's fast evolving nature and its growing
interconnectedness with traditional finance. As an example, some of crypto's inherent
financial vulnerabilities became painfully apparent during the crypto-winter of 2022 and
2023. Think only of the spectacular rise and fall of FTX.
The authorities represented at the FSB have taken important steps to effectively
regulate crypto-related activities - either through the introduction of new rules or
through the enhanced enforcement of existing rules & regulations.
In recent years we have also seen that those national initiatives were not always fully
aligned with each other. Therefore, the FSB published a Global Regulatory Framework
last year, aimed at supporting the consistency and comprehensiveness of regulatory
approaches to crypto-asset activities. But the job is not done yet. 'Crypto' is at a
crossroads, and if society wants to stay on the path towards responsible innovation, we
cannot be complacent.
Let me highlight two interesting market developments.
First of all, the emergence of so-called 'multifunction crypto-asset intermediaries', or
MCIs, has shown that crypto may not be as decentralized as some claim it to be. These
entities combine economic functions in a manner that is not commonly seen in
traditional finance. We also find that most MCIs lack proper governance. As a result, the
functioning of MCIs may actually amplify financial vulnerabilities.
MCIs can also form nodes that link the crypto-ecosystem with the broader economy and
investors. This means that, at a certain scale, their failure could have serious
implications for the wider financial system. A key policy lesson we thus learned is that, if
needed, these entities should be able to be wound down in an orderly manner:
memento mori, or in this case, remember that you may fail.
Next to MCIs, we have seen revived interest in the stablecoin market, following earlier
crypto-market turmoil. Some of this interest has come from BigTechs and traditional
financial institutions. These institutions could leverage large existing customer bases
and rapidly issue a more widely used stablecoin. The potentially significant systemic
implications of such a stablecoin means they require careful regulation and oversight.
After all, these coins have proved to not always be that 'stable'.
It is thus essential that we keep opting for fitting regulation. At the same time, let me be
clear: opting for regulation is not a stamp of approval. Investing in crypto remains a
risky and volatile business, illustrating that our work is not done yet. In the meantime, I'd
like to therefore also stress: memento perdere - remember that you may lose.
The FSB's regulatory framework forms a global baseline. However, on top of this
baseline, individual jurisdictions can implement additional measures should national
circumstances require them to do so. For example, we observed that the financial
stability risks presented by crypto-assets may already be heightened in some EMDEs.
These jurisdictions often have weaker domestic currencies or large underbanked
populations.
I do recognize that not all EMDEs are the same. As we can see right here in Asia, there
can be a wide variety of EMDEs in a single region, and advanced economies could also
be in the mix. There is however one common risk for EMDEs: residents might come to
primarily rely on off-shore providers of crypto-services. This dynamic may require us to
place greater emphasis on effective cross-border regulatory cooperation. Without such
coordination and cooperation, crypto service-providers may find it easier to evade local
requirements. In this context, the FSB is doing further work to practically address the
cross-border regulatory challenges of stablecoins for EMDEs.
Also central in our framework is the principle of 'same activity, same risk, same
regulation'. This principle means that effective regulation should fit the financial stability
risks that crypto-activities pose. Flashy marketing terms might muddy the waters for
regulators. This makes it all the more important to find the actual underlying economic
functions and risks.
Publishing a framework is only part of the job. The most important next step is making
sure that our recommendations are consistently implemented across the globe.
Because, without globally consistent implementation, certain crypto-service providers
may continue to evade regulation.
The FSB aims to deliver effective and consistent implementation of its regulatory
framework by working closely with other standard-setting bodies, such as IOSCO, the
IMF, and FATF. Because crypto-asset activities are inherently cross-border, specific
attention will go to promoting implementation beyond the FSB's membership. We will do
this through our own channels, including our regional consultative groups. But we will
also closely work on this with the IMF - given it's near global membership.
As implementation is ongoing, we are committed to learning new lessons and to keep
responding to new developments in the crypto-ecosystem. The sector is moving fast, so
there is no room for complacency.
Before moving to a conclusion, I would like to touch upon one of these developments:
tokenization. Creating a digital representation of an asset and placing it on a distributed
ledger could bring benefits to the financial system. This includes efficiency gains and
potentially increased liquidity of certain assets. Of course, there may also be risks for
financial stability. For example, tokenization could increase the linkages between the
crypto-ecosystem and traditional finance. The FSB is assessing the financial stability
implications of tokenization, although our work is still in the early stages. And we are not
the only standard setter considering this topic.
To conclude, the crypto ecosystem is at a major cross-roads. We cannot presume that
this innovation, and potentially more decentralization, will bring significant benefits to
the global financial system. What I do know is that the full benefits of digital innovation
stemming from crypto-assets can only be realised if there is durable trust in the sector.
For this, we need to keep working on a strong and consistent regulatory system, to
safeguard financial stability.