Talking to the Financial Times, Benoit Cœuré, who heads the BIS Innovation Hub, suggested the Financial Stability Board (FSB) is the most likely forum for global regulators to agree on a consistent regulatory framework for crypto-assets. In October, the FSB published a review of stablecoin regulation and previously made high level recommendations about regulating stablecoins.
Cœuré said that decentralized finance (DeFi) had been a wake-up call because of its rate of growth and the “interconnectedness with traditional finance which creates potentially new forms of systemic risk”. He was referring to stablecoins being the bridge between crypto-assets and traditional finance.
DeFi enables cryptocurrencies to be traded or lent without a centralized intermediary, apart from a piece of software code. More often than not, stablecoins represent the settlement asset for both trading and lending. DeFi has grown from $1 billion in assets in June 2020 to $234 billion today (DeFi Llama).
The BIS executive said a regulatory framework could be put together in 2022, although it would take two to three years to be implemented across jurisdictions.
Need for global cooperation
In a follow-up tweet, Cœuré observed that as a result of tech innovation in finance, “The balance is shifting between global financial integration and strategic considerations. Governments raising technological fences will end up fragmenting the global financial system. Cooperation is needed.”
On the topic of central bank digital currencies (CBDC), he noted the conversation is shifting from CBDC being an alternative to private money towards CBDC being the glue to hold ecosystems together. Several central bankers have made this latter point in the last few weeks, including the European Central Bank’s Fabio Panetta and the Bank of England’s Sir Jon Cunliffe.
Meanwhile, incumbent institutions are frustrated over proposed Basel rules that make it expensive for financial institutions to hold crypto-assets on their balance sheet. This follows proposed Basel III rules earlier this year that class crypto-assets in a very high risk category requiring greater capital commitment.