What does the G20’s Upcoming Crypto Rules Proposal Mean for Markets?

Key Points

• The G20’s FSB said on Monday it plans to propose “robust” crypto rules in October.
• The FSB’s announcement comes as regulators across major economies move to bring the nascent crypto sector into the regulatory fold.
• Once subject to regulation, the crypto sector could benefit from a flood of incoming institutional capital.

What Happened?

The Financial Stability Board (FSB), a group of central bankers, regulators and finance officials from the Group of 20 nations, announced on Monday that it plans to propose “robust” global crypto rules in October. According to the FSB, recent ructions in crypto markets have highlighted the need to regulate what it called a highly “speculative” sector.

“The FSB will report to the G20 Finance Ministers and Central Bank Governors in October on regulatory and supervisory approaches to stablecoins and other crypto-assets,” the FSB said. “These combined efforts of the FSB and the international standard-setting bodies are aimed at minimizing the risk of fragmentation and regulatory arbitrage”.

The FSB has so far only focused on the monitoring of the cryptocurrency and digital asset space. Back in February, it released a report highlighting a multitude of risks stemming from the sector, including the potential failure of certain stablecoins and threats to financial stability from the rapid growth of Decentralised Finance (DeFi).

The FSB announcement comes shortly after the US Treasury recently a fact sheet where it laid out how it could work with foreign regulators to regulate crypto in a way that ensures “America’s core democratic values are respected”.

According to the US Treasury, the primary objective of international cooperation on crypto would be to combat its use in illicit finance, promote financial inclusion, and support technological advancement, whilst also reinforcing “US leadership in the global financial system”.

Global Regulators Push for Crypto Regulations

The FSB’s latest announcement comes at a time when policymakers across most of the world’s developed economies are moving to implement their own crypto rulebooks.

Last month, EU lawmakers agreed on a major piece of legislation called the Markets in Crypto Act (MiCA). Under the current proposals, crypto companies would need to first get a license and provide customer safeguards prior to the issuance of digital tokens/assets to EU consumers.

One lawmaker said the legislation would tame the current “Wild West” crypto market. Crypto firms would also need to provide strong protections to the assets being held in customer wallets and would be liable in case they get lost. MiCA is likely to be rubberstamped by the European Parliament sometime in 2023, with its rules likely to be phased in by the end of 2024.

Meanwhile, two US Senators (Wyoming Senator Cynthia Lummis and New York Senator Kirsten Gillibrand) recently proposed legislation to introduce broad crypto regulations in the US called the “Responsible Financial Innovation Act”.

The bills would clarify what cryptocurrencies/digital asset products can be classified as commodities, thus putting them under the regulatory purview of the US Commodities and Futures Trade Commission (CFTC), and what can be classified as securities, thus putting them under US Securities and Exchange Commission Purview. The bill would also create a regulatory structure around stablecoins.

Elsewhere, the UK Treasury has outlined its desire to turn Britain into a “global crypto hub” and will introduce comprehensive legislation later this year.

Regulation to Spark the Next Crypto Boom

Whilst some often libertarian-leaning cryptocurrency enthusiasts continue to view governments with suspicion and cling to the idea that the current crypto revolution doesn’t need government regulations, there is a growing consensus that the implementation of a strong, pro-crypto regulatory regime across major economies could actually be one of the best things to ever happen to crypto.

Dozens of surveys of investment/wealth managers over the past year or so have indicated that there is a growing institutional interest in allocating a portion of portfolios into digital assets. The implementation of comprehensive crypto regulations could open the flood gates of many billions of institutional capital to enter the sector, analysts think.

Specifically, one would suspect that the implementation of a broad crypto regulatory framework would pave the way for the approval of spot Bitcoin and other cryptocurrency/digital asset ETFs. The SEC has so far refused to give these ETFs the greenlight amid concerns about the lack of regulation of crypto exchanges. Numerous surveys have shown that many investment managers would be significantly more likely to invest in digital assets if there was a regulated spot ETF.

Meanwhile, at present, uncertainty over the future of crypto regulations is stifling innovation in the sector, analysts argue. If say by the end of 2024, there is comprehensive legislation covering digital assets, DeFi and stablecoins across the likes of the US, Canada and UK, crypto firms will be better able to plan for the future. This will improve their ability to raise and put capital to work. The benefits will be amplified if rules can be fairly well synchronized across geographies, which is one of the FSB’s key stated aims.

Given the current inexorable trend towards the acceptance and regulation of cryptocurrency/digital assets and their associated technology in most major economies, it seems likely that a shift towards regulatory clarity in the coming years should act as a tailwind that is likely to give a significant lift to the prices of all major cryptocurrencies.

Bitcoin is, of course, the prime candidate to succeed, but highly successful projects such as Ethereum, Binance Coin and its smart chain, Solana, Cardano, Polkadot and more would also likely benefit.

But if regulatory agencies play their cards right, stablecoins have the potential to transform the global payments infrastructure. In particular, if the US can properly regulate private stablecoins to ensure their stability and then make them legal tender, it can solidify the US dollar’s role as the global reserve currency for the rest of the century.

China has banned crypto in order to reduce the competition for the digital yuan it is trying to roll out. The authoritarian Chinese government will no doubt use the yuan to garner more over its citizens and as a tool of coercion/surveillance. Meanwhile, USD-pegged blockchain-based US dollar stablecoins will offer their global users all of the same privacy and censorship-resistance benefits as cash and crypto. To most global consumers looking for a stable currency, the choice is going to be obvious.