Benoît Coeuré says regulators should agree on a crypto framework in 2022

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Financial regulators are expected to agree on a global framework for crypto next year after the rapid growth in decentralized finance has given them a “wake-up call,” one of the debate’s most important figures told the Financial Times.

Benoît Coeuré, head of the innovation hub at the Bank for International Settlements, said conversations about high-level global principles for cryptocurrency and decentralized finance have intensified in recent months.

The former European Central Bank board member has led the BIS innovation hub for the past two years, giving it a front row seat in international crypto policy deliberations as banks centers around the world use the BIS to share information and set global guidelines.

Coeuré, who announced Thursday that he had been appointed head of the French competition authority, said that “it was not necessarily the wrong decision” for regulators to allow the market to develop and to understand “how crypto assets work “.

“But now that it’s growing really, really fast and… Becoming mainstream in different ways, then the time has certainly come for consistent regulation,” he said in an interview last week.

Coeuré said the new “wake-up call” was decentralized finance – a rapidly growing corner of the cryptocurrency market that uses distributed ledger technology and so-called “smart contracts” to perform transactions of value. of billions of dollars without a central hub like an exchange.

Decentralized finance, or DeFi as it’s called, “opens up new avenues. . . for the interconnection with traditional finance which potentially creates new forms of systemic risk “that regulators can no longer ignore, said Coeuré, noting that DeFi was connected to both stablecoins, which are widely used as an instrument for settling securities. DeFi platforms, and traditional finance.

“Those [new] services will compete with traditional finance, and money will flow in and out from one universe to another. This creates a compelling reason to start a discussion about the global principles of crypto regulation. “

The pace at which rules are changing in individual jurisdictions also heightens the urgency of establishing a global framework. “The risk in 2022 is that the major jurisdictions [like] Europe, the United Kingdom, the United States, China continue to advance but on different paths and produce an overall inconsistent system, ”said Coeuré.

“This is a risk that should be avoided and there is still time to avoid it,” he added, stressing that different approaches would create the opportunity for “regulatory arbitrage” where businesses and individuals could play with the authorities by choosing the most advantageous places for their business. .

Coeuré said the Financial Stability Board, a global grouping of finance ministries and regulators hosted by the BIS, would be the most natural forum to agree on a cohesive framework, and that it was possible for them to do so in 2022. , although he warned that “we are probably at least two or three years before we have a stable landscape globally” as it will take time for countries to adopt the measures.

He added that the crypto framework could include category agreements for different activities and decide whether a stablecoin – a form of cryptocurrency backed by traditional assets like the dollar – is electronic money, a money market fund, or a title. It should also include guidance so that “service providers in these ecosystems and platforms are regulated according to the services they provide”.

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Coeuré was in favor of “strong consumer protection rules” and “personally, it would not matter if pension funds were banned from investing in crypto. . . this seems contrary to the security one expects from a pension fund ”.

Nonetheless, he admitted that despite strong arguments for global cooperation, different countries’ approaches to privacy would limit the reach of a global framework, as would the reluctance of some countries to share details about the technology. used in their ecosystems, since technology used in finance often overlaps with technology used for other strategic purposes.

“The final decisions of sovereign states will be. . . a balance between sovereign strategic considerations on the one hand and considerations on the proper functioning of the financial system on the other, ”he declared. “It’s not new, it’s just that. . . these balances change because technology is so important. The new risk is that governments raise technological barriers that create fragmentation of the global financial system. “

He also said policymakers were increasingly aware that the central bank’s digital currency “should not be treated as a separate discussion” or allowed to stay in the separate lane where it has developed. “We see the discussion pivot. . . to CBDC (central bank digital currency) being. . . a fundamental contribution to the new ecosystem, ”he said.

“You need central bank money as a safe asset that can be used as a settlement asset to make the new system stable. . . It is not that the CBDC is the sovereign alternative to private money, but rather that the CBDC is the glue that will hold the system together.

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