Just when you think that crypto has failed …

Just when you think that cryptocurrencies are unregulated and ridiculous, the industry spends four years to work out a set of standards to ensure trust. Who would have thought it?

Global cryptoasset standards

This set of global principles of good practice in the Global Cryptoasset Standards has been developed to provide a common set of guidelines to promote the integrity and effective functioning of the Cryptoasset Market. It is intended to promote a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of Market Participants, supported by resilient infrastructure, are able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behavior.

As made clear by market events in the Cryptoasset industry, there is a need amongst Market Participants for Cryptoasset Standards which define principles of good practice. The industry and engaged consumers would benefit from Market Participants adhering to standards for matters including ethics, governance, and risk mitigation, as this would facilitate responsible activity and potentially reduce instances of institutional collapse. There are many unique features of the Cryptoasset industry as compared to the traditional finance industry, so Market Participants, such as those who drafted these Cryptoasset Standards, are particularly well positioned to provide this guidance. The Global Cryptoasset Standards does not impose legal or regulatory obligations on Market Participants nor does it substitute for regulation, but rather it is intended to serve as a supplement to any and all local laws, rules, and regulation by identifying global good practices and processes.

The Global Cryptoasset Standards is maintained by the GBBC Digital Finance (GDF).

The GDF is an industry association accelerating digital finance through the adoption of best practices and standards and engagement with regulators and policymakers. Established in 2018, GDF has convened a broad range of industry participants, with 300+ global community members – including some of the most influential companies, academics and professional services firms supporting the industry.

The GDF assesses regularly whether particular Cryptoasset Market developments warrant specific revisions to the Global Cryptoasset Standards and when judged appropriate, undertakes a comprehensive review of the Global Cryptoasset Standards.

The GDF has leveraged the framework and high-level principles existing in the FX Global Code to define the framework for the Global Cryptoasset Standards. The GDF received explicit approval to consider the FX Global Code in this drafting process. In certain instances, the Global Cryptoasset Standards includes principles referenced in the FX Global Code without material revision, as they are directly analogous, applicable and appropriate in a cryptoasset context. In other instances, the GDF makes substantive revisions to principles in the FX Global Code to address risks specific to Cryptoasset Markets. Finally, the GDF established a number of net new principles to provide guidance for unique risks in the Cryptoasset Markets.

The Global Cryptoasset Standards is organized around six leading principles:

• Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the Cryptoasset Market.
• Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their Cryptoasset Market activity and to promote responsible engagement in the Cryptoasset Market.
• Execution: Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent Cryptoasset Market.
• Information Sharing: Market Participants are expected to be clear and accurate in their communications and to protect Confidential Information to promote effective communication that supports a robust, fair, open, liquid, and appropriately transparent Cryptoasset Market.
• Risk Management and Compliance: Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage, and report on the risks associated with their engagement in the Cryptoasset Market.
• Confirmation and Settlement Processes: Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to pro- mote the predictable, smooth, and timely settlement of transactions in the Cryptoasset Market.

More information on the GDF is available at www.gdf.io.

Interestingly and, in some ways conflictary, are the Financial Stability Board ‘s (FSB) report on the proposed framework for international regulation of the cryptocurrency industry.

Below is a summary of each of the proposed cryptocurrency industry regulation categories.

1. Cybersecurity and accountability. It is suggested to create a special list of blockchain wallets that are associated with security breaches and add them to a public list of suspicious addresses. Customer protection in case of hacks must be a priority. The balance between bug bounty programs and real hacks can be found in a standard called “5-5”, where the hacker has to return 5% of the stolen assets to the victim within 24 hours of the breach. The remaining funds are to be considered a generous bug bounty.
2. Asset listing and recognition of certain cryptocurrencies as securities. Cryptocurrency platforms have to conduct the Howey Test (a test from the U.S. Supreme Court case that is used to determine whether an instrument qualifies as an "investment contract" for the purposes of the U.S. Securities Act) over cryptocurrencies. If the result is negative, the cryptocurrency can be considered to not be a security, unless there is an opposite decision by an appropriate court of jurisdiction. Cryptocurrency exchanges may also publish an overview of the assets traded on the platform, where the status of tokens will be indicated.
3. Tokenization of traditional equities. Traditional equities market bear settlement risk that results from a long chain of entities being involved in the securities market transaction. This poses a threat that certain brokers that have low regulatory capital buffer may fail to settle the gains of a large number of retail investments in similar cases that took place during AMC Entertainment Holdings, Inc. (AMC) or GameStop Corp. (GME) stock rallies in 2021. Tokenized stocks may settle almost instantaneously essentially removing the settlement risk from the transaction. However, regulations on its issuance, registration, disclosure, clearing, and custody have to be drafted.
4. Customer protections, disclosures, and suitability. SBF calls for the customer knowledge test procedure to be implemented by the cryptocurrency service providers with regard to a particular product the customer wants to interact with. Only customers who pass the test on the mechanics of the product must be allowed to access it. Centralized cryptocurrency service providers shall have various disclosure and transparency regimes in place for the products and services they are offering. Wealth-based tests for customer suitability are seen by the author as discriminatory and not practically effective enough.
5. Sanctions, allowlists, and blocklists. The strategy around sanctions compliance shall be built around blocklists (block transactions that are associated with sanctioned addresses), instead of allowlists (processed only allowed transactions while blocking all others). It is suggested that a responsible actor like the Office for Foreign Asset Control (OFAC) of the U.S. Department of the Treasury maintain an on-chain list of sanctioned addresses that can be accessed by market participants. Wallet holders must have the ability to whitelist their addresses if the illicitly sourced funds were transferred to them without their knowledge. Such funds may be sent by a victim to a special address maintained by a responsible actor for further burn or custody.
6. DeFi. There should not be licensing or registration procedures for codes on a blockchain, with blockchain validators, also being outside the scope of financial regulation. Certain permissions or licensing procedures may be considered for centralized platforms that solicit and market DeFi protocol to retail clients since this activity is somewhat correlated with broker-dealing or futures commission merchant business. Writing a code for a decentralized exchange, trading there, and doing peer-to-peer transfers must be not subject to regulation.
7. Stablecoins. Regulation of stablecoins must be supportive in nature, mainly protecting the digital economy from system risks. Stablecoins must be in fact supported by the pegged currency or government securities. Issuers of stablecoins must publish up-to-date public information, including audit reports, about the underlying assets of the token. In case of minting or redeeming a stablecoin (token on-ramp/off-ramp process), the issuer company must conduct a Know Your Customer (KYC) procedure similar to the one required under the Bank Secrecy Act (BSA) for the individual or entity that initiates the process.

And then you have the Bank of International Settlements (BIS) who have also created a discussion document around these themes. The key takeaways includ:

• The "shadow financial" functions enabled by crypto markets share many of the vulnerabilities of traditional finance. These risks are exacerbated by specific features of crypto.
• Authorities may consider different – not mutually exclusive – lines of action to tackle the risks in crypto. These include containment or regulation of the crypto sector or an outright ban.
• Central banks and public authorities could also work to make TradFi more attractive. A key option is to encourage sound innovation with central bank digital currencies (CBDCs).

Of course, there would be a different take from BIS and the FSB as they are the State and not the Network.