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TradFi Pushed Financial Stability Board to Go Hard on Crypto Industry
TradFi wants to make hay in the wake of the several crypto collapses and the FTX fraud last year, pushing now for more onerous regulations for the industry it sees as a direct threat to the established financial order.
TradFi players are pushing international standard setters to go bolder in regulating the crypto sector, despite crypto advocates warning that such actions will stifle the development of blockchain technology, according to documents published by the Financial Stability Board on Jan. 4.
Financial Stability Board (FSB) proposed a “comprehensive” international crypto rulebook covering financial stability and consumer protection – just as the standard-setter sought to do for TradFi in the wake of the 2008 crisis.
The Financial Stability Board seems to have been prescient when, last year, it warned that major crypto companies face conflicts of interest – saying that, for example, a crypto exchange could block out competition from rival market makers operating on its platform.
Just a few weeks later, CoinDesk revealed a blurring of lines between FTX and its supposedly separate trading arm Alameda Research. That snowballed into allegations of a misuse of customer funds, and that Alameda enjoyed an unlimited line of credit.
The company has now filed for bankruptcy, and former chief executive Sam Bankman-Fried on Tuesday pleaded not guilty to charges of money laundering and wire fraud in a New York courtroom.
Coming after the collapse of crypto lender Celsius, stablecoin terraUSD and hedge fund Three Arrows Capital, the turbulent year in crypto has only given extra grist to the mill of TradFi players who want crypto actors to play by the same rules.
“The case for extending the regulatory perimeter is now clear-cut… the regulatory approach must be comprehensive,” said U.K. bank Standard Chartered in its response to the FSB consultation.
The “egregious examples of the FTX collapse and others” show the need to clarify how to segregate and protect customer assets, TradFi lobby group the Institute for International Finance told the FSB.
“Given recent market developments in the crypto-asset ecosystem and the uncertainty brought by the collapse of key market players, we support global regulators and standard setters in their mission to bring order and financial stability to crypto-asset markets,” said the Global Financial Markets Association, which represents capital market players such as investment banks.
According to the World Federation of Exchanges, whose members include Nasdaq, the Intercontinental Exchange and the London Stock Exchange Group, the FSB should even “strengthen its stance in requiring separation of activities,” ensuring the same standards apply as would for TradFi players, when crypto companies simultaneously operate platforms, execute trades, and hold or issue cryptocurrency.
Established crypto players, meanwhile, have warned the FSB not to throw the baby out with the bathwater – and to respond to crypto risks without impeding the benefits of its innovation.
This is the kind of dangerous overreach, egged on by those who would benefit from fettering DeFi and crypto, that could stifle the very innovation blockchain promises. It will also drive capital and talent to markets that don’t place these kinds of heavy burdens on developers and founders. It’s not enough for the industry to advocate for its interest, we have to start pushing back against these kind of proxy attacks by competing industries.