Regulators propose first global rules before ‘crypto winter’ thaws.

LONDON, Oct 11 (Reuters) – Cryptocurrency firms should set aside capital like banks when taking on similar activities, regulators suggested on Tuesday in their first global rules as the “crypto winter” wiped $2 trillion from the industry , leaving investors to suffer losses.

The Financial Stability Board (FSB), which coordinates financial rule-making among the Group of 20 (G20) economies, made nine recommendations for members to apply.

Currently, the sector is largely unregulated in most countries, only having to comply with anti-money laundering and anti-terrorist financing rules, as regulators warn investors they risk losing every penny.

Klaas Knot, the president of the Dutch central bank who chairs the FSB, said the “crypto winter,” or the recent sharp retreat in cryptocurrencies, has reinforced the board’s assessment of existing structural vulnerabilities.

The FSB said cryptocurrencies, which have a total value of about $935 billion compared to $3 trillion at their peak in November last year, were not big enough to threaten financial stability, but rules were needed to regulate a possible recovery.

“Concerns about the risks they pose to financial stability are therefore likely to come back to the fore sooner rather than later,” Knot said in a letter to G20 finance ministers meeting in Washington this week.

The FSB recommends putting in place a framework to oversee and manage risk and data at crypto companies, as well as having plans in place for the smooth winding down of troubled cryptocurrency companies.

“Several cryptocurrency lenders failed during the recent market turmoil as a result of vulnerability to runs, limited capitalization, concentrated exposures to risky entities and risky trading and business ventures,” the FSB said.

The proposals seek cross-border consistency in the regulation of crypto-assets, particularly as the European Union finalizes ground-breaking rules to regulate the sector from 2024.

The basic principle is that the same activity should be regulated in the same way, whether undertaken by a cryptocurrency company, bank or payment provider, and that crypto companies may need to separate certain functions to ensure this, the FSB said.

The proposals are out for public consultation until December 15, before being finalized in mid-2023, when FSB members are expected to fast-track their implementation.

The FSB also revised its guidance on the regulation of stablecoins, a type of cryptocurrency that is usually backed by a currency such as the dollar or assets.

The collapse of the dollar-backed Terra stablecoin in May highlighted the high risk of loss and potential fragility of stablecoins that lack a stabilization mechanism, the FSB said.

The watchdog said most existing stablecoins do not meet its guidelines and proposed revisions to the guidance that include strengthening stablecoin governance and stabilization mechanisms and clarifying and strengthening redemption rights.

Report by Huw Jones. edited by David Evans

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