Crypto Assets section of China's Central Bank Financial Stability Report: Proposes regulatory principles similar to those of the US SEC

Editor**|**Wu Says Blockchain

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On December 22, the Chinese People’s Bank of China released the “China Financial Stability Report 2023”, which rarely set up a separate “crypto assets” section on a large scale, did not use the traditional Vitual Money of the past, and put forward the principle of “same business, same risk, same supervision” similar to that of the US SEC.

Chapter 3 “Non-Bank Institutions and Others”: Other Industries and Emerging Risks: (1) Crypto Assets

Crypto assets carry both financial and digital risks. Cryptoassets refer to private sector digital assets that rely primarily on the development and operation of cryptography, distributed ledgers, or similar technologies, creating new asset forms and business models. Crypto-assets are not issued by monetary authorities, do not have monetary attributes such as legal compensation and mandatory, and are not subject to regulatory requirements appropriate to their business substance, thus exhibiting both financial and digital technology risks. On the one hand, the risks of traditional unregulated illegal financial activities are reflected in the cryptoasset sector, such as asset price bubbles, high price fluctuations, liquidity and maturity mismatch, high leverage and pro-cyclical risks. On the other hand, new types of risks related to digital technologies have arisen in this field, such as the lack of a “negative feedback” adjustment mechanism for self-executed Smart Contract, which is more likely to lead to a “flash crash” in the market, the security vulnerabilities in the process of interacting with off-chain data on Blockchain and being easily attacked by Hacker, resulting in market manipulation and asset loss, and the governance mechanism of DeFi (Decentralized Finance) is essentially “centralized” Anonymity of assets and difficulty in recovery lead to AML and anti-terrorist financing risks.

China was the first to clean up and rectify the risks related to the field of crypto assets. At present, the scale of crypto assets accounts for a small proportion of global financial assets and has limited relevance to the traditional financial system, but its rapid development, complex business model, opaque governance structure, and active cross-border business may threaten the stability of the global financial system. China earlier carried out cleanup and rectification in the fields of Token issuance and financing, crypto asset trading platforms, etc., and issued the Notice on Further Preventing and Dealing with the Risk of Vitual Money Trading Speculation in 2021, uniting multiple departments to form a joint force for risk prevention, resolution and disposal, effectively curbing risks in related fields.

Since 2022, there have been frequent risk events in crypto assets, and regulatory authorities and international organizations in many countries have issued regulatory policies and countermeasures. Crypto assets are developing rapidly in overseas markets, the business scale continues to grow, and the business model continues to expand, expanding from traditional crypto assets to Stable Coin and Decentralized Finance fields such as Decentralization lending, asset management, financial Derivatives, exchanges, insurance, etc., and fraud incidents are frequent. Since 2022, a series of risk events such as the collapse of the TerraUSD Stable Coin and the collapse of the crypto asset trading platform FTX have led to significant market turmoil, further highlighting its problems such as high price Fluctuation, strong speculative attributes, and imperfect governance mechanisms, which have a spillover impact on the stability of the financial system. In view of the inherent cross-border nature of crypto assets, it is necessary for countries to cooperate and form regulatory synergies. In recent years, regulators and international organizations in many countries have begun to assess the risks of crypto-assets, introduce regulatory policies and countermeasures, and generally carry out supervision of crypto-asset businesses commensurate with their risk levels in accordance with the principle of “same business, same risks, and same supervision”, and minimize regulatory data gaps, drop regulatory fragmentation, and eliminate regulatory Arbitrage. **

Chapter 5: Macro-prudential Management (VI) Designated Rules for the Supervision of Crypto Assets

In February 2022, the FSB released the Financial Risk Assessment Report on Cryptoassets, which identified that the rapidly evolving cryptoasset market could pose a threat to global financial stability. In July 2022, the FSB issued a statement on cryptoasset regulation, stating that an effective international regulatory framework should ensure that cryptoasset activities are fully regulated in accordance with the principle of “same activity, same risk, same regulation”. In July 2023, based on a study of member economies’ practices in regulating cryptoassets, the FSB proposed a framework of recommendations for international regulation of cryptoassets. According to the recommended framework, the FSB issued two high-level regulatory recommendations in the same month: first, “Monitoring, Supervision and Supervision of Cryptoasset Business and Market”, which defines the functional characteristics of cryptoassets and markets, clarifies the regulatory scope of the proposed framework, sorts out the current status of cryptoasset regulatory rules, and puts forward policy recommendations on regulatory framework and powers, cross-border cooperation and information sharing, governance and risk management of cryptoasset issuers and service providers, data collection, information disclosure, and prevention of financial stability risks. In order to adapt to the rapid development of global Stable Coin Stable Coin in recent years, it is recommended that the regulatory authorities be given sufficient tools and powers, implement functional supervision, and require global Stable Coin to establish adequate governance structures and Risk Management mechanisms, and formulate appropriate recovery and disposal plans.