Benoît Cœuré says regulators likely to agree crypto framework in 2022

Financial regulators are likely to agree a global framework for crypto next year after the rapid growth of decentralised finance gave them a “wake-up call”, one of the most senior figures in the debate told the Financial Times.

Benoît Cœuré, chief of the Bank for International Settlements’ innovation hub, said conversations about high level global principles for cryptocurrency and decentralised finance had intensified in recent months.

The former European Central Bank governing council member has headed the BIS innovation hub for the past two years, giving him a front-row seat to international deliberations on crypto policy as the world’s central banks use BIS to share information and set global guidelines.

Cœuré, who announced on Thursday had been nominated to lead France’s competition authority, said it “wasn’t necessarily the wrong decision” for regulators to allow the market to develop and to garner an understanding of “how crypto assets work”.

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

Cœuré said the new “wake-up call” was decentralised finance — a rapidly growing corner of the cryptocurrency market that uses distributed ledger technology and so-called “smart contracts” to carry out billions of dollars worth of transactions without a central hub like an exchange.

Decentralised finance, or DeFi as it is known, “opens new avenues . . . for interconnectedness with traditional finance which creates potentially new forms of systemic risk” that regulators can no longer ignore, Cœuré said, pointing out that DeFi connected with both stablecoins, widely used as a settlement instrument on DeFi platforms, and traditional finance.

“These [new] services will be competing with traditional finance, and money will flow in and out from one universe to another. This creates a compelling reason to start a discussion on global principles for crypto regulation.”

The pace at which rules are developing in individual jurisdictions is also strengthening the urgency for delivering a global framework. “The risk in 2022 is that large jurisdictions [like] Europe, the UK, the US, China, keep moving on but along different tracks and produce a system which is globally inconsistent,” said Cœuré.

“That’s a risk that should be avoided and there’s still time to avoid it,” he added, pointing out that different approaches would create the opportunity for “regulatory arbitrage” where companies and individuals could game authorities by picking the most advantageous places for their business.

Cœuré said the Financial Stability Board, a global grouping of finance ministries and regulators hosted by BIS, would be the most natural forum to agree a consistent framework and that it was possible for them to do it in 2022, though he cautioned that “we are probably at least two or three years away from having a stable landscape globally” since it will take time for countries to adopt the measures.

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

Cœuré favoured “strong consumer protection rules” and “personally wouldn’t mind if pension funds were to be prohibited from investing in crypto . . . it seems to be contrary to the kind of safety that you expect from a pension fund”. 

Still, he conceded that despite the strong case for global co-operation, different countries’ approaches to privacy would limit the scope for a global framework, as would some countries’ reluctance to share details about the technology used in their ecosystems, since the technology used in finance often overlaps with the technology used for other strategic purposes.

“The final decisions of sovereign states will be . . . a balance between sovereign strategic considerations on the one side and considerations about the good functioning of the financial system on the other,” he said. “That’s not new, it’s just that . . . these balances are shifting because technology is so important. The new risk is governments raising technological fences which create fragmentation in the global financial system.”

He also said policymakers were increasingly aware that central bank digital currency “should not be treated as a separate discussion” or allowed to stay in the separate track where it has developed. “We’re seeing the discussion pivoting . . . towards CBDC (central bank digital currency) being . . . a foundational 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’s not about CBDC being the sovereign alternative to private money, it’s more about CBDC being the glue that will hold the system together.”