Report Overview
"Crypto, tokens and DeFi: navigating the regulatory landscape" is an industry report published by the Financial Stability Institute of the Bank for International Settlements in May 2023. The report provides a comprehensive analysis of how 19 jurisdictions are responding to the risks associated with cryptoassets and decentralized finance (DeFi).
Key Insight: Addressing the risks posed by cryptoassets has become a pressing issue for policymakers. Cryptoasset markets have experienced cycles of growth and collapse, often resulting in large losses for investors. These markets pose risks which, if not adequately addressed, might undermine consumer protection, financial stability and market integrity.
Key Data Points
Key Insights Summary
Centrally Managed Activities Are Primary Focus
Most current regulatory initiatives target centrally managed cryptoasset activities, with particular focus on service provision. This includes licensing, prudential, AML/CFT and consumer protection requirements.
Stablecoins Receive Special Attention
Several jurisdictions are developing frameworks for issuers of stablecoins used for payment. These frameworks introduce licensing, capital and reserve requirements but differ across countries.
Security Tokens Subject to Existing Regulation
All covered jurisdictions require issuers of security tokens to comply with securities regulation. Some authorities have exempted small-scale issuances from full application of securities regulation.
Community-Managed Activities Pose Challenges
For DeFi protocols, most initiatives were in the form of analytical papers. Only a few authorities have issued guidance on smart contracts or clarified requirements for decentralized exchanges.
Retail Investor Protection Is Priority
All jurisdictions have issued warnings to retail investors about cryptoasset risks. Some have banned distribution of certain cryptoassets to retail investors or imposed restrictions on promotional activities.
International Coordination Is Essential
The global nature of cryptoassets requires effective cooperation among national and international regulators. A coordinated response is essential to prevent regulatory arbitrage.
Content Overview
Document Contents
Executive Summary
Addressing the risks posed by cryptoassets has become a pressing issue for policymakers. Cryptoasset markets have experienced cycles of growth and collapse, often resulting in large losses for investors. These markets pose risks which, if not adequately addressed, might undermine consumer protection, financial stability and market integrity.
This paper provides an overview of policy measures taken in 19 jurisdictions to address the risks associated with activities that incorporate cryptoassets and DLT programmability capabilities in financial services. Cryptoasset activities are classified into three categories: (a) issuance; (b) operation of a DLT infrastructure; and (c) service provision.
Different types of policy measure across jurisdictions include bans, restrictions, clarifications, bespoke requirements and initiatives to facilitate innovation. As these measures tend to reflect the evolution of market developments, most current initiatives target centrally managed cryptoasset activities, with a particular focus on service provision.
Introduction
Advances in cryptography, computing science and computing power have transformed digital ledgers. These developments have enabled the creation of distributed ledger technology (DLT) that allows a network of participants to establish a shared and immutable record of ownership.
DLTs have enabled the creation of cryptoassets and decentralised finance (DeFi). Although the concept of DLT existed before Bitcoin and blockchain, it was not until the publication of Satoshi Nakamoto's whitepaper in 2008 that this technology started to attract attention.
Activities that incorporate cryptoassets and DLT programmability capabilities promise to open up opportunities for the provision of financial services but come with risks and challenges. Cryptoassets and DeFi ecosystems show structural flaws and pose risks that, if not addressed, might undermine consumer protection, financial stability and market integrity.
Definitions and Classification Criteria
The paper classifies policy measures along three dimensions:
- Cryptoasset Activities: Issuance, operation of DLT infrastructure, and service provision
- Management of Activities: Centrally managed vs community-managed
- Types of Cryptoasset: Stablecoins, security tokens, utility tokens, governance tokens, and native tokens
Key Definitions
| Term | Definition |
|---|---|
| Stablecoin | Cryptoasset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets |
| Security Token | Token that provides rights and obligations similar to traditional financial instruments such as shares, debt instruments or units in a collective investment scheme |
| Utility Token | Token which provides users access to a specific good, service or application when they redeem the token |
| Governance Token | Token issued as an incentive, allowing the user the purported opportunity to become a partial owner and decision-maker in a DeFi protocol |
| Native Token | The base token of a blockchain that plays an integral part of the operation of the protocol it is issued on and that is created at its genesis |
Policy Measures on Centrally Managed Cryptoasset Activities
This section covers policy measures targeting entities and actors involved in:
- Issuance activities (stablecoins, security tokens, utility tokens)
- Infrastructure activities
- Service provision activities
Stablecoin Regulation
Regulators in the EU, Hong Kong SAR, Japan, Singapore, the UAE, the United Kingdom and the United States are pursuing stablecoin regulations. These initiatives introduce licensing, capital and reserve requirements but differ across countries in terms of terminology, type of license, redemption rights and standards for governance and risk management practices.
Security Tokens
Issuers of security tokens are subject to the same regulation as issuers of traditional securities in all covered jurisdictions. Securities regulators have clarified the applicability of securities regulation to security tokens focusing on asset characteristics rather than on the technology used to exchange them.
Service Providers
Most jurisdictions have introduced authorisation, prudential, AML/CFT and consumer protection requirements for cryptoasset service providers. Regulatory approaches include establishing bespoke frameworks, introducing specific derogations from applicable legislation, issuing clarifications on how existing payments or securities regulation apply, and restricting or prohibiting certain activities.
Policy Measures on Community-Managed Cryptoasset Activities
This section covers policy measures addressing risks associated with:
- Native tokens created on public DLTs
- DeFi protocols enabling financial functions through smart contracts
Native Tokens
For activities where native tokens are involved, some authorities rely on a broad interpretation of "rights" attached to a native token to define if it is a security and thus clarify the application of securities regulation. Others use concrete examples for additional guidance.
DeFi Protocols
For DeFi protocols, most initiatives were in the form of analytical papers. At present, only one authority in the covered jurisdictions has issued guidance on the adoption of smart contracts. Another has clarified the applicable requirements related to decentralised exchanges and staking activities.
A few authorities have taken enforcement actions addressing AML/CFT and investor protection risks posed by certain protocols. A small number have introduced initiatives to facilitate the adoption of protocols with certain features by traditional financial intermediaries under a trusted environment.
Policy Measures on Users' Direct Exposures to Cryptoassets
This section covers policy measures addressing risks associated with users' direct exposures to different types of cryptoasset and related activity.
Retail Investors
All jurisdictions covered have issued warnings to retail investors about the risks posed by cryptoassets, and some of these warnings target specific types of cryptoasset (eg native tokens, security tokens and non-fungible tokens). A few jurisdictions have banned the distribution of certain cryptoassets to retail investors and others have imposed restrictions on promotional activities.
Wholesale Investors
For wholesale investors, no jurisdiction has so far introduced rules to mitigate risks stemming from traditional financial institutions investing in cryptoassets. Recent policy initiatives aimed at regulating the exposure of institutional investors to cryptoassets have centred predominantly on banks and investment funds.
Future Challenges and Concluding Remarks
Policymakers may face further challenges as cryptoasset markets evolve and DLT programming capabilities are applied to new use cases. Continuous efforts will be needed to understand novel business models and their underlying risks, to build or maintain the skills and capacity to adequately assess potential implications on financial markets and to adjust policy responses promptly.
The global nature of cryptoassets poses significant challenges that require effective cooperation and coordination among national and international regulators. Jurisdictions cannot entirely mitigate the risks associated with cryptoassets if policy measures are susceptible to gaps and inconsistencies across borders. A coordinated response is essential.
In this context, international standards that promote a consistent regulatory framework will play a key role in preventing regulatory arbitrage and a fragmented regulatory environment that could undermine financial stability.
Note: The above is only a summary of the report content. The complete document contains extensive data, charts, and detailed analysis. We recommend downloading the full PDF for in-depth reading.