Compliance

G7 Nations Push For Crypto-Asset Regulatory Scrutiny After Market Drama

Tom Burroughes, Group Editor, 24 May 2022

articleimage

Perhaps inevitably, the wild swings in parts of the digital assets markets of recent weeks have prompted major industrialised nations such as the US, the UK and the European Union to call for more oversight, citing the need to protect financial stability.

The Group of Seven major industrialised nations has endorsed global moves to examine whether the rise of crypto-assets such as bitcoin pose a threat to the financial system, commenting in the wake of dramatic falls in some entities known as “stablecoins.”

The G7 is composed of Canada, France, Germany, Italy, Japan, the UK and the United States. In addition, the European Union is a “non-enumerated member". The G7 urged the Financial Stability Board, an intergovernmental body that monitors and makes recommendations about the global financial system, to push forward the rapid development of rules for this fast-growing area.

In the already-febrile atmosphere of global markets, roiled by worries about rising inflation, supply-chain disruptions and a return to higher interest rates, the wider cryptocurrency market has suffered. Prices of bitcoin, for example, have fallen. Two main stablecoins from the crypto project Terra have collapsed with some calling the incident a Ponzi scheme. Terra dollar's sister token Luna has fallen dramatically. UST lost its dollar peg when millions of investors sought to cash in on their tokens at the same time. Investors learned that the UST reserve mechanism was flawed – UST is an algorithmic stablecoin, backed by its sister asset Luna.

“In light of the recent turmoil in the crypto-asset market, the G7 urges the FSB, in close coordination with international standard setters, to advance the swift development and implementation of consistent and comprehensive regulation of crypto-asset issuers and service providers, with a view to holding crypto-assets, including stablecoins, to the same standards as the rest of the financial system,” according to a communique issued by the US Department of the Treasury last Friday. 

In particular, the G7 calls for rapid implementation of the Financial Action Task Force (FATF) ‘travel rule’ and stronger disclosure and regulatory reporting, for instance, as regards reserve assets backing stablecoins. "We reaffirm that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory and oversight requirements through appropriate design and by adhering to applicable standards,” the Treasury said.

Last week PGIM, the $1.4 trillion investment arm of US-listed Prudential Financial, warned that cryptocurrencies such as bitcoin are a “poor choice” for long-term investors and make portfolios riskier and more volatile.

The drama came at a time when digital assets – a term covering a variety of entities ranging from cryptocurrencies to tokens and smart contracts – have become more “mainstream,” gaining business from wealth managers, banks and other regular institutions. 

“The crypto space has always been exposed to volatile market shifts, and this has finally come to a head with the collapse of the Terra USD stable coin,” Alex Richter, head of PassFort, said. (PassFort is a financial crime and compliance automation business.)

“The G7’s calls for FSB to act are in the interest of protecting individuals' financial assets. For the cryptocurrency market to truly enter the mainstream and gain universal trust and acceptance, more crypto firms and exchanges need to follow the lead of BitPay and Diginex and incorporate rigorous compliance processes into their offering,” Richter continued. “This will enable crypto businesses to better adhere to the coming regulation while reducing the possibility of massive market fluctuations. In an increasingly complex regulatory environment, businesses need the right tools to ensure they keep abreast of changes and meet compliance demands.”

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes