Regulatory oversight of crypto assets fragmented, says FSB

The Financial Stability Board (FSB) has published a report on crypto assets, focusing on work underway, regulatory approaches and potential gaps, warning that regulators are taking a divergent approach

The report has been prepared for G20 finance ministers and central bank governors for their meeting in Fukuoka on 8-9 June where the FSB will be calling on ministers to keep regulatory approaches and potential gaps in crypto asset oversight, including the question of whether more coordination is needed, under review.

The FSB continues to assess that crypto assets do not pose material risks to global financial stability at present, but that they do raise a number of further policy issues beyond financial stability.

The main focus of regulators is on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring. They are also monitoring and analysing developments in these markets, setting supervisory expectations for firms and clarifying how international standards apply to crypto assets.

The FSB expressed concerns that gaps may arise in cases where such assets are outside the perimeter of market regulators and payment system oversight. To some extent, this may reflect the nature of crypto assets, which have been designed to function outside established regulatory frameworks.

‘At the national level, authorities have chosen different approaches and taken various types of actions to address relevant issues,’ the FSB report said. ‘In some cases, differences in regulation between jurisdictions reflect different national market developments and differences in underlying legal and regulatory frameworks for the respective financial systems.’

The OECD has also completed analysis to understand the potential of ICOs as a ‘mainstream’ financing option for SMEs, irrespective of the type of project or business model employed by the business. The report examined policy implications of such activity related to regulation and supervision of token issuances on a national and cross-border basis, financial consumer protection and financial education, and called for clarity and proportionality in the regulatory and supervisory framework.

The current Basel framework does not set out an explicit treatment of banks’ exposures to crypto assets, it does set out minimum requirements for the capital and liquidity treatment of ‘other assets’. In the first instance, the Basel Committee on Banking Supervision (BCBS) conducted a stocktake of how its members currently treat such exposures as part of their domestic prudential rules. BCBS is now considering whether to formally clarify the prudential treatment of crypto assets across the set of risk categories, including credit, counterparty credit, market, liquidity, etc).

Accounting and audit

While the FSB report focuses on the main global regulators such as BCBS, OECS and OECD, at a oversight level, there are also few international standards or guidance to shape the approach to the accounting treatment or auditing of crypto assets, with the current accepted practice being to use currency and intangible asset options.

The International Accounting Standards Board (IASB) for example has not issued a detailed paper on reporting crypto currency and assets under International Financial Reporting Standards (IFRS) for example, with no specific guidance on accounting treatment.

However, there is no clarity about the most appropriate accounting treatment. Most experts think, however, that cryptocurrencies do not have the necessary qualities to be defined as cash or cash equivalent under current IFRS (and similarly FRS 102) largely due to their relative volatility and low liquidity.

There does seem to be a growing consensus that, under current accounting principles, cryptocurrencies like Bitcoin come under the scope of IAS 38 Intangible Assets, the catch-all standard for intangible assets not covered elsewhere.

In the UK, the Financial Reporting Council (FRC) has not issued any guidance on accounting issues relating to cryptocurrencies, although a spokesperson says the body is ‘monitoring the situation, should any concerns over the accounting be raised with us’.

On the tax front, in the UK, HMRC has issued guidance for tax compliance for individuals trading in crypto but has yet to produce detailed information about how businesses investing and operating crypto payment systems need to comply.

‘HMRC’s approach to cryptocurrency taxation is to apply existing statute and case law: there are no cryptocurrency specific rules. Individuals will be regarded as trading, and so subject to income tax and national insurance accordingly, only if the badges of trade are met,’ said Michelle Robinson, director at Deloitte.

‘While the general position is that the existing and familiar statute applies to cryptocurrency, its taxation can be complicated in practice. The practical implications of valuing cryptocurrency and sometimes numerous acquisitions and disposals across more than one account can provide particular practical challenges. It is vital that adequate records are maintained continuously, to enable the individual’s tax position to be determined and evidenced.’

On audit standards, there is little of substance either, as yet, with standard setters adopting a ‘wait and see’ approach.

Jeanne Boillet, EY global assurance innovation leader said: ‘The audit considerations for cryptocurrencies compared to more traditional assets and transactions are not fundamentally different’ but need to be applied in a more complex environment.

‘This is due partly to the complexity of the IT environment and the lack of any central authority - there is no central bank or other authority behind cryptocurrencies. Additional complexities stem from the anonymity and lack of transparency of transactions, which increases the risk of money laundering, as well as volatility in the values of cryptocurrencies.

Progress on establishing a more robust regulatory environment has been slow, but FSB warns that ‘assessing the significance of potential gaps is challenging, given the rapidly evolving nature of the crypto-asset ecosystem and related risks. A forward-looking approach to monitoring crypto assets can help provide a basis for identifying potential gaps and areas that should be prioritised or focused on.’

2019 FSB report, Work underway, regulatory approaches and potential gaps, issued 31 May 2019

FSB framework for monitoring of financial stability implications of crypto assets issued October 2018 

Sara White
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