Global Regulators Could Agree on Crypto Framework in 2022, Says BIS’ Benoît Cœuré

Benoît Cœuré, chief of the Bank for International Settlements’ innovation hub (BIS), suggested that financial regulators should agree on a global framework for crypto next year after the rapid growth of decentralized finance, according to the Financial Times.

Conversations about high-level global principles for cryptocurrency and decentralized finance had intensified in recent months, said Benoît. The BIS acts as a bank for central banks, and it supports them to achieve monetary and financial stability. It also provides central banks and financial supervisors with a forum where they can exchange information and decide common actions. Thus, the BIS could be used as the platform to agree on common guidelines.

Benoît, who may soon leave the BIS to move to the antitrust regulator in France, highlighted that regulators could no longer ignore decentralized finance, or DeFi, as it “opens new avenues… for interconnectedness with traditional finance which creates potentially new forms of systemic risk.” The combination of DeFi and stablecoins, used as a settlement instrument on DeFi platforms, has the potential to compete with traditional finance and “this creates a compelling reason to start a discussion of global principles for crypto regulation.”

These remarks are aligned with the BIS quarterly review released on December 6 where the BIS exposed the vulnerabilities and risks of DeFi. The BIS suggested that if DeFi were to become mainstream, it could undermine financial stability because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers such as banks. One of the most interesting points was what the authors of the paper called “decentralization illusion,” which means that though DeFi is aimed to provide financial services without intermediaries, its need for governance makes some level of centralization inevitable.

The BIS doesn’t suggest that DeFi should be banned or limited, but it claims that in order to be widely used as a form of financial intermediation, DeFi “will need to be properly regulated” and that “centralized governance is needed to make strategic and operational decisions.”

See Also: Treasury Official Presses Congress to Create Uniform Crypto Framework

Regulation of crypto assets may be the way forward, and countries like the U.S., Europe, the U.K. and Australia are already working on new rules that could come in 2022. However, there is more likely to be a patch of regulations in each country than a common global framework.

On the one hand, BIS’ suggestions seem to focus almost exclusively on DeFi, and stablecoins to a certain extent, but regulators around the world may be poised to look at the whole crypto ecosystem at once, rendering coordination more difficult. On the other hand, international organizations need years to come up with agreements or guidelines that are usually non-binding for its signees and, as Benoît suggests, the need for rules may necessitate a quicker response by governments. And last, the number of technical and political considerations, like monetary sovereignty, sets the bar really high to agree on a common framework that actually brings any significant result.

Benoît’s opinion is that a crypto framework could include agreements on categories for different activities and deciding whether a stablecoin is electronic money, a money-market fund or a security. It could also include guidance so “service providers in these ecosystems and platforms are regulated according to the service they are providing.”

While these possible guidelines and a common framework will be good to have, they may be too little, too late — most of the main economies in the world are already working on extended sets of regulations which will likely be legally binding. Besides, this new technology is already raising novel legal questions in terms of privacy, data sharing and even applicable jurisdiction that, in most cases, will need answers at a national level. Finally, many central banks and politicians are wary of the role that digital money could play, not only in a specific economy, but globally. Thus, countries may not be willing to share all the information that they may have until they really understand the impact this could have in their finances.

See Also: President’s Working Group: Stablecoin Risks Warrant Legislation

Nonetheless, cooperation and common agreements on certain issues like money laundering, illicit activities and some sort of consumer protections may be agreed upon among central banks.

In summary, BIS´s studies and remarks points to an increasing need for regulation in the crypto space as risks to the financial stability may be too great for regulators to ignore. However, a global crypto framework in 2022 seems a bit stretch, given the complexity of the subject and the national interests each country would likely want to defend.