The Watchmen of Wall Street: How Global Regulators First Classified and Tracked Crypto in 2018
In the rapidly evolving world of decentralized finance, regulatory history is crucial. While it often feels like regulators are perpetually playing catch-up, the groundwork for global monitoring was laid surprisingly early. We are diving into a foundational document: the 2018 report by the Financial Stability Board (FSB) to the G20, mandated after the dramatic crypto market growth of 2017.
This report marks the moment the world’s most powerful financial institutions—including the FSB, the Basel Committee on Banking Supervision (BCBS), and the International Organization of Securities Commissions (IOSCO)—collectively focused their analytical power on digital assets. It wasn't just about determining risk; it was about building the essential framework to measure risk, set standards, and protect investors in an asset class they openly admitted was fragmented, opaque, and prone to manipulation.
Key Takeaways from the 2018 Regulatory Blueprint
- No Immediate Systemic Risk: In July 2018, the FSB concluded that crypto-assets did not pose a material risk to global financial stability, but demanded vigilant monitoring due to the speed of development and severe data gaps.
- A Coordinated Monitoring Framework: The FSB, alongside the Committee on Payments and Market Infrastructures (CPMI), developed specific metrics to monitor financial stability risks, focusing on market size, growth rate, leverage, and institutional exposures.
- Investor Protection Focus on ICOs: IOSCO established an ICO Consultation Network and developed a "Support Framework" to help member jurisdictions classify and regulate Initial Coin Offerings (ICOs), stressing the importance of protecting investors against fraud.
- Banking Exposure Scrutiny: The BCBS initiated a critical stocktake to quantify banks’ direct and indirect exposures to crypto-assets, signaling the initial effort to clarify how such holdings should be treated under prudential (capital adequacy) rules.
- Caution on CBDCs: The CPMI was actively monitoring digital tokens but advised central banks to proceed with caution regarding Central Bank Digital Currencies (CBDCs), viewing the move as entering uncharted territory.
The Four Pillars of Early Global Crypto Regulation
The report details the highly coordinated effort across major standard-setting bodies (SSBs), each tackling the crypto issue through the lens of its specific mandate:
The Financial Stability Board (FSB): Building the Barometer
The FSB’s primary contribution was the creation of a monitoring framework designed to identify emerging stability concerns in a timely manner. Given the nascent state of public data in 2018, the FSB stressed that data quality was often poor, relying on public sources that could be susceptible to prohibited practices like "wash trading," "spoofing," and "pump and dump" schemes.
Critical metrics identified for monitoring included: market capitalization and growth rate, use of leverage, financial institution exposure, and confidence effects related to price volatility.
IOSCO: Protecting Markets and Investors from ICOs
IOSCO focused intensely on investor protection and market integrity, driven by the massive growth in ICOs. Their work centered on fundamental regulatory challenges:
Defining Crypto-Assets: Regulators needed to determine if a crypto-asset was a security, commodity, or another financial product, as this classification dictates regulatory oversight.
Regulating Platforms: IOSCO highlighted concerns about crypto-asset platforms (exchanges), noting that many might be operating without complying with laws applicable to traditional exchanges or intermediaries. They began exploring whether existing securities market principles could apply to these platforms, addressing issues like transparency, custody, and cybersecurity.
The Basel Committee (BCBS): Clarifying Bank Risk
The BCBS’s work was purely focused on maintaining the safety and soundness of the banking system. At the time, data on banks’ crypto holdings was scarce. The BCBS committed to two major tasks: quantifying the materiality of banks’ exposures (both direct and indirect) and clarifying the prudential treatment of these assets within the Basel III framework. This established the foundation for future, far stricter, capital requirements for bank crypto holdings.
CPMI: The Future of Payments and DLT
The Committee on Payments and Market Infrastructures (CPMI) monitored the underlying technology—Distributed Ledger Technology (DLT)—and its applications. They noted that "first generation" digital tokens (like Bitcoin) were inherently "unsafe money" due to decentralization and lack of underlying claims. Their forward-looking work included monitoring the development of improved "second generation cryptocurrencies" and conducting deep analysis into the viability, safety, and cross-border implications of CBDCs.
Conclusion: The Dawn of Digital Asset Oversight
The 2018 FSB report was not merely a reaction; it was a blueprint for the formal integration of digital assets into the global financial surveillance architecture. By coordinating the work of the key standard-setting bodies, the G20 ensured that regulatory responses were comprehensive, touching on stability (FSB), banking risk (BCBS), market integrity (IOSCO), and payments infrastructure (CPMI).
While the conclusion that crypto posed no material risk in 2018 might seem quaint today, this foundational document set the tone for all subsequent global policy, highlighting the persistent challenges that continue to dominate regulatory discussion: data quality, investor protection on opaque platforms, and the necessity of quantifying financial sector exposure.
Source Report: Crypto-assets: Report to the G20 on work by the FSB and standard ...
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