Australian Prudential Regulation Authority says crypto will force changes to ‘regulatory architecture’

“To support healthy innovation in the industry, there will be a need for regulatory innovation and new rules, such as the prudential treatment of crypto-assets under consideration by the Basel Committee on Banking Supervision” , said APRA in its article.

APRA seems to support the “technology-neutral” approach of the Basel Committee. The BCBS has suggested that while the economic functions of crypto assets pose the same risk as traditional assets, they should be subject to the same capital, liquidity and other requirements to which they are tied.

The Basel Committee also cautioned against designing regulations “in a way that explicitly advocates or discourages the use of specific technologies related to crypto assets.”

Respond to the market

APRA said the pace of technological change in the financial services industry “means there will be a need to keep the framework dynamically up to date.” It said it would seek to simplify the prudential framework for smaller entities, “reducing the burden where possible without compromising safety”.

Regulators are being forced to respond to the market, where billions of dollars of investment capital have been poured into blockchain over the past year, the technology underlying crypto assets that secures transaction records using the cryptography.

A report on global blockchain investment, released Wednesday by CB Insights, found that $25.2 billion was provided to blockchain start-ups in 2021. This was up 713% year-over-year, although transactions fell in the fourth quarter. of the 2021 calendar.

All this did not go into financial services. But global decentralized finance (DeFi) transactions nearly doubled in 2021, with 240 transactions generating $3.4 billion in equity. The largest DeFi rounds were made by US companies Celsius Network, Alchemy, and ConsenSys, which each raised over $200 million. But the operations remain tiny compared to traditional finance.

Polarized views

A report released last week by Oliver Wyman, who works with many global banks and regulators on currency shifts, suggests that Basel thinking could come to fruition for crypto assets to be regulated in the same way as other financial assets.

Title Cryptoactives: tulips or dot-coms? this indicates polarized views on crypto in the market, but suggests that regulators will adopt a common ground that recognizes that while most crypto assets do not have cash flow rights or carry equity like conventional stocks and bonds, they are no more volatile than many US stocks benefit from greater market liquidity and may generate interest or other compensation.

“Money is changing dramatically, and this transformation will change the financial system as a whole,” said Mr. Elliott of Oliver Wyman.

“The sa strong political and bureaucratic will to maintain the relevance of central bank money at a time when the use of cash is rapidly declining [is] making CBDCs almost inevitable in most countries,” he said, referring to central bank digital currencies.

The federal government accepted almost all of the recommendations of a comprehensive review of the payments system led by attorney Scott Farrell, who called on regulators to strengthen coordination and adopt a more functional approach. This will force them to look at the nature of the service provided, not the entity providing it.

The Treasury and the Reserve Bank will study the viability of a central bank digital currency, a digital version of cash, in the retail market and report back to the government by the end of the year. Any CBDC would help facilitate the trading of digital assets using an RBA-backed digital version of the Australian dollar.

APRA also emphasized a “digital first” philosophy recognizing that digitalization can contribute to better regulation. This year it will appoint an advisory group to explore the potential of “suptech” (retirement technology) and regtech (regulatory technology) solutions, APRA said.

“Internationally, many jurisdictions are beginning to explore how regtech and suptech can be used, for example by developing machine-readable regulations to facilitate compliance systems.”

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