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.
While the turmoil experienced in these markets at the end of 2022 has so far not led to wider contagion, the outcome might have been worse had the cryptoasset markets and the traditional financial system been more interconnected. Policymakers are considering their response to crypto-related risks. Potential lines of action, which are not mutually exclusive, include banning specific activities, isolating cryptoasset markets from the traditional financial system, regulating cryptoasset activities in a manner akin to traditional finance and developing alternatives that improve the efficiency of the traditional financial sector.
These lines of action will be contingent on the risks posed to the provision of financial services by the various activities involving cryptoassets and their underlying technology, referred in this paper under the umbrella term of distributed ledger technology (DLT). For lines of action which consider regulating cryptoasset activities, the question depends on policymakers’ assessment of which risks posed by cryptoassets and related activities should be captured by regulation and whether those risks are captured by existing regulation or if there are gaps that need to be addressed.
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. In this paper cryptoasset activities are classified into three categories based on the proposed taxonomy by the Financial Stability Board (FSB): (a) issuance; (b) operation of a DLT infrastructure; and (c) service provision (eg wallet, custody, payment, exchange, lending).
For the overview of policy measures, initiatives are classified into three categories depending on whether they address the risks associated with (i) centrally managed cryptoasset activities; (ii) community-managed cryptoasset activities;4 or (iii) users’ direct exposures to cryptoassets and related activities.
One of the paper’s observations is that in experimentation initiatives, authorities are involved in use case pilot schemes. The aim is to gain practical knowledge of the functioning of DLT-based applications and to test the efficacy of potential solutions for potential risks. Some jurisdictions that have taken this approach are Canada, Singapore and South Africa. Canada has conducted an initiative (Project Jasper) with the aim of analyzing the implications of the use of DLTs in the payments system.
South Africa has also experimented the use of DLT with the industry. In particular, phase 2 of Project Khokha has analyzed the possibility of issuing, clearing and settling debentures via DLT using tokenized money. In this pilot, industry participants were able to purchase the debentures with a wholesale central bank-issued digital currency (wCBDC) and a wholesale digital settlement token (wToken). The wToken can be seen as a privately issued stablecoin used for interbank settlement.