The central bank releases "China Financial Stability Report 2024": Global and Hong Kong Cryptocurrency Compliance Progress

Author | Colin Wu

Recently, the People's Bank of China released the "China Financial Stability Report (2024)", in which many paragraphs made extensive reference to global cryptocurrency regulatory developments, with a focus on Hong Kong's cryptocurrency compliance progress.

Page 47 (Non-Bank Institutions and Other Sections)

Regulatory authorities in various countries continue to enhance the supervision of crypto assets. After the crypto asset market experienced a series of risk events in 2022, prices and trading volumes rebounded significantly in 2023. At the end of the year, the global market value of crypto assets reached US$1.55 trillion, a year-on-year increase of 10.71%. In view of the spillover risks that crypto-assets may have on the stability of the financial system, regulatory authorities in various countries have continued to increase the supervision of crypto-assets. Currently, 51 countries and regions around the world have introduced bans on crypto-assets, and some economies have adjusted their original laws or regulations. Re-legislate regulations.

The United States regulates crypto asset issuers who violate the Securities Act based on existing regulatory regulations. The U.S. Securities and Exchange Commission (SEC) rejected more than 20 spot Bitcoin ETF applications from 2018 to 2023. After approving the listing of Bitcoin spot ETFs in January 2024, the Chairman of the SEC stated that this did not mean that the SEC approved or recognized Bitcoin products, and investors should still be cautious about the risks associated with Bitcoin and products whose value is linked to crypto assets;

The European Union approved the "Crypto-Asset Market Supervision Act", establishing the world's first complete and clear regulatory framework for virtual assets. The act is scheduled to be officially implemented by the end of 2024;

The UK accelerated the pace of legislation on virtual assets and promulgated the Financial Services and Markets Act, bringing crypto assets into the scope of regulation;

Singapore has released the Stablecoin Regulatory Framework, which clarifies the scope of regulated stablecoins and issuer conditions;

Japan has enacted the "Funds Settlement Act" to limit the issuers of stable coins to institutions such as licensed banks, registered transfer agencies and trust companies.

Hong Kong, China, is actively exploring crypto asset license management. Hong Kong, China, divides virtual assets into two categories for supervision, namely securitized financial assets and non-securitized financial assets, and implements a unique “dual license” system for operators of virtual asset trading platforms, namely “security tokens”. Applicable to the Securities and Futures Ordinance" regulatory and licensing system, "non-security tokens" are applicable to the "Anti-Money Laundering Ordinance" regulatory and licensing system, institutions engaged in virtual asset business need to apply for a registration license from the relevant regulatory authorities before operating. At the same time, large financial institutions such as HSBC and Standard Chartered Bank are required to bring crypto asset exchanges into the scope of daily customer supervision.

Macro-prudential management section on page 67

In recent years, crypto asset activities have become increasingly complex and the market has become more volatile. Overall, the correlation between crypto-asset activities and systemically important financial institutions, core financial markets, and market infrastructure is limited. However, as the application scenarios of crypto-assets increase in payment and retail investment, crypto-assets may trigger conflicts in some economies. risk.

The FSB and relevant standard-setting bodies jointly developed a global regulatory framework for crypto assets, which guides regulatory authorities to respond to financial stability risks related to crypto assets based on the principle of "same activities, same risks, same supervision".

The IMF and FSB have developed a regulatory policy roadmap to identify macroeconomic and financial stability risks in response to cryptoassets. The roadmap organizes work related to the implementation of the crypto-asset regulatory policy framework, aiming to promote global information sharing and cooperation and fill the data gaps required for the rapid changes in the crypto-asset ecosystem.

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**Financial Stability Board releases international regulatory framework

for crypto assets**

In July 2023, the FSB released an international regulatory framework for crypto assets, proposing high-level regulatory recommendations for crypto assets and "global stablecoins" a, aiming to improve the global consistency of regulatory methods for the crypto asset industry, reduce regulatory loopholes, and prevent regulatory arbitrage. , effectively prevent financial risks.

1. General Principles of Two Supervision Suggestions

The first is the principle of “same business, same risks, same supervision”. If crypto-assets and "global stablecoin" businesses have the same economic functions as traditional financial businesses and are accompanied by the same types of financial risks, they should comply with the same regulatory requirements.

The second is the principle of flexibility. Regulatory authorities in each economy can apply existing laws and regulations to the crypto-asset industry, or formulate new laws and regulations to implement relevant regulatory recommendations.

The third is the principle of technology neutrality. Supervisory authorities in each economy should regulate crypto-asset businesses based on their economic functions and risk characteristics, rather than their underlying technology.

2. Contents of regulatory recommendations

The two regulatory proposals set out specific requirements for regulatory authorities, crypto asset issuers and service providersb.

High-Level Recommendations on the Monitoring, Supervision and Regulation of Crypto-Asset Businesses and Markets (CA Recommendations)

The CA recommendations contain a total of 9 high-level recommendations.

1. Regulatory powers and tools. Supervisory authorities should have appropriate regulatory powers, tools and sufficient resources to supervise crypto assets and effectively enforce relevant laws and regulations.

2. Comprehensive supervision. Supervisory authorities should implement comprehensive supervision commensurate with the risks of crypto assets in accordance with the principle of “same business, same risks, same supervision”. Such as formulating regulatory policies that match their risks, scale, complexity and systemic importance; assessing whether current regulatory measures can cope with the financial stability risks caused by crypto-assets, and expanding or adjusting the regulatory scope as appropriate; unifying the crypto-asset market and traditional financial markets Regulatory standards to fully protect the interests of all relevant parties.

3. Cross-border cooperation, coordination and information sharing. In view of the cross-border nature of crypto-assets, regulatory authorities should fully consider their spillover risks, promote efficient communication, information sharing and consultation at home and abroad, and promote regulatory consistency.

4. Governance framework. Crypto-asset issuers and service providers should develop and disclose comprehensive governance frameworks that are commensurate with their risks, scale, complexity and systemic importance and the financial stability risks they may pose, with clear accountability mechanisms. Have procedures in place to identify, address and manage conflicts of interest.

5. Risk management. Crypto-asset issuers and service providers should establish an effective risk management framework that can identify, measure, evaluate, monitor, report and manage all major risks; have reputable management that can effectively supervise compliance issues; Establish contingency plans and business continuity plans (BCP), comply with the relevant anti-money laundering requirements of the Financial Action Task Force (FATF), protect customer assets and reduce the risk of customer assets being damaged, misused or unable to be paid on time.

6. Data management. Cryptoasset issuers and service providers should establish a comprehensive data management system: to ensure the integrity and security of data and comply with relevant laws and regulations on data security; to promptly correct erroneous data to ensure reliable data quality; to be able to report comprehensively, timely, accurately and continuously Relevant data information; supports cross-economy data sharing and improves public understanding of crypto assets.

7. Information Disclosure. Cryptoasset issuers and service providers should fully disclose information. The information disclosed includes necessary information such as operation, trading, management and product risk characteristics; custody relationship terms, safeguard measures for customer assets and custodian bankruptcy risks; and major technical risks, such as network security risks and environmental climate risks.

8. Address financial stability risks arising from the link between the crypto-asset ecosystem and the financial system. Supervisory authorities should effectively monitor the interconnections within the crypto-asset ecosystem and between the crypto-asset ecosystem and other financial systems, and identify and resolve potential financial stability risks.

9. Comprehensive supervision of multi-functional crypto asset service providers. Supervisory authorities should require service providers to build an organizational management system that is consistent with their overall strategy and risk profile; when service providers fail to comply with existing regulations or have serious conflicts of interest, they should take effective measures in accordance with the law; closely guard against concentration risks and related transactions Risks, additional prudential supervision requirements should be formulated when necessary; cross-border service providers should be required to share information to prevent risks from spreading overseas.

"High-Level Recommendations on the Regulation of "Global Stablecoins" (GSC Recommendations)

The GSC recommendations include a total of 10 high-level recommendations. In addition to the 7 requirements similar to the CA recommendations on regulatory power, governance framework, risk management, etc., 3 separate recommendations are also proposed.

1. Recovery and Disposal Plan. “Global stablecoins” should develop appropriate recovery and resolution plans to support orderly liquidation or resolution within a legal framework and ensure that key functions and activities can resume or continue to operate.

2. Redemption rights, stability and prudential requirements. Users should be provided with strong legal claim rights or protection against the issuer or underlying reserve assets of the "global stable currency" and ensure timely redemption: explain the redemption procedures, redemption fees and claims to users, including under pressure How to ensure smooth redemption under this scenario; there should be reserve assets equal to the amount of stable coins in circulation, and the reserve assets should be composed of high-quality and highly liquid assets that are unsecured, easy to liquidate, and have no loss. When an issuer becomes insolvent, ownership of reserve assets should be protected; prudential requirements (including capital and liquidity requirements) should be adhered to; and sufficient liquidity should be available to deal with outflows.

3. Pre-operation regulatory requirements. "Global stablecoins" should comply with the market access requirements (such as licenses or registrations) of the host economy before operation, and build the necessary products and systems to adapt to new regulatory requirements.

3. Work progress and future prospects

Follow up on the implementation of member policies. Track the main market and regulatory developments since the issuance of regulatory recommendations, and summarize the implementation progress, experience and practices, and problems and challenges faced by FSB members’ high-level regulatory recommendations for crypto assets and “global stablecoins”.

Evaluate the effectiveness of implementation of regulatory recommendations. Before the end of 2025, cooperate with relevant international organizations to assess the implementation of regulatory recommendations by member economies, ensure comprehensive and consistent implementation of regulatory recommendations, and determine whether it is necessary to update the recommendations.

Continue to study and improve regulatory policies. Research the potential financial risks of multi-functional crypto asset service providers and assess whether additional regulatory policies are needed based on the potential impact.

Expand the scope of implementation and monitoring. Take measures together with relevant standard-setting bodies and other international organizations to promote the effective implementation of regulatory recommendations in non-FSB members and reduce regulatory arbitrage risks. Invite non-FSB member economies with significant cross-border crypto-asset business to join FSB-related working groups to expand the scope of cross-border monitoring of crypto-assets.