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Opinion 24 September 2020

Crypto-assets: “same activity, same risks, same rules

Natalia Español and Lucía Pacheco, from BBVA's Digital Regulation team, analyze in this op-ed the regulation of crypto-assets. "Luckily, both global bodies and European authorities seem on the right track and looking for a solution that is comprehensive and coordinated", they say.

Defining an appropriate regulatory response to the challenges created by crypto-assets has been a concern for financial regulators around the world for a considerable long time already, but it has not been until recent months that we start to witness real advancement in this front. In June last year, Facebook announced the launch of a blockchain network with its own currency, Libra, which has amplified the financial stability perspective of the crypto-assets challenge, given the potential systemic importance of this network. This move has not only spurred authorities around the world to assess the risks this market could pose, but has also emphasized the need to coordinate a global regulatory and supervisory response.

The first milestone in this response came from the G7, who pointed out in October 2019 that the so-called global stablecoins might induce risks both within and outside the financial arena. This first step has been followed by a joint effort by international bodies, coordinated by the Financial Stability Board, to define an appropriate regulatory response to global stablecoins.

This global coordination is, in fact, essential not only because crypto-asset arrangements are global in nature, but also because they show a greater fragmentation of roles and responsibilities among independent service providers. Blockchain technology allows for sophisticated ecosystem interactions, describing novel schemes with functions and liabilities distributions that previous regulation could not foresee. It is therefore essential to ensure that liabilities within the different parties are appropriately allocated and that the regulatory and supervisory approach is harmonized globally, in order to avoid regulatory arbitrage or gaps in the application of mismatching frameworks.

Also, some challenges traditionally falling out of financial authorities’ remit, such as data protection or fair competition, need a globally coordinated approach in order to avoid regulatory arbitrage and ensure a level-playing field. Digital markets’ competition dynamics –including data access and network effects– could for instance contribute to a stablecoin arrangement becoming a dominant payment system for some market segments (e.g. cross-border payments). In this scenario, market concentration on a single infrastructure, a single reserve management scheme and small number of service providers could have an impact on financial stability.

Complementing this global coordination effort, authorities in different jurisdictions have also taken a leap forward in this front. In particular, in Europe, the Commission is about to publish a legislative proposal on the regulatory framework for crypto-assets, as part of its forthcoming Digital Finance Strategy, a new roadmap to boost financial innovation in the region. The Commission, building on the feedback received to a public consultation runned earlier this year, is taking a holistic approach in targeting both crypto-assets that could qualify as existing financial instruments as well as crypto-assets that currently fall outside the regulatory perimeter. And as in the global debate, stablecoins sit high on this agenda.

In crafting this regulatory response, authorities should abide by the principle “same activity, same risks, same rules”, building on existing regulatory frameworks where businesses involving crypto-assets lead to similar risks as those performed with traditional ones. This is key to avoid asymmetries between analogous services and assets that could fall under different frameworks due to technicalities. In practice, this might require clarifying how the existing securities market regulatory framework applies to tokens that qualify as securities, as well as assessing the scope of the rules on electronic money to include certain stablecoins. This is not per se a minor challenge, but gets heightened in its goal to ensure a globally consistent response on the basis of dissimilar jurisdictional frameworks.

Therefore, much work lies ahead for regulators and policymakers to ensure a regulatory response that encourages innovation in the crypto-assets markets whilst mitigating risks. Luckily, both global bodies and European authorities seem on the right track and looking for a solution that is comprehensive and coordinated.