Why international collaboration around cryptoasset regulation is critical

Iota Kaousar Nassr

Senior Policy Advisor, OECD

Because digital assets such as cryptoassets — and the wider decentralised finance market — are global by nature, we need to achieve a global consensus on how to address emerging risks.

Decentralised finance markets involving crypto, stablecoins, DeFi protocols and other digital assets are borderless by nature. That can allow for regulatory arbitrage opportunities, especially given the speed and ease with which crypto firms can move geographic locations.

Important risks involved with cryptoassets

An incomplete and fragmented regulatory landscape has led to market participants effectively providing financial services outside of the traditional regulatory perimeter. The fact that these markets are currently characterised by an absence of regulatory safeguards for consumer protection and market integrity creates material risks.

The recent period of rapidly declining valuations in the crypto markets left retail investors disproportionately affected by the failures of cryptoasset firms compared to insiders who managed to cover some of their losses fast.

Future downturns could have a greater impact on the stability of our traditional financial markets through increased interconnectedness between the two markets. This is why it is imperative that we, as policymakers, advance our work in the space.

Despite challenges, there are aspects of
decentralised finance that hold promise
for financial markets more broadly.

Global consensus on how to address risks is critical

We must seek global consensus on how to address risks emerging in the wider market for decentralised finance, including crypto, to protect investors and avoid regulatory arbitrage opportunities. The Organisation for Economic Cooperation and Development (OECD) can play a vital role through evidence-based policy analysis and facilitating international dialogue with relevant stakeholders.

Cryptoasset mining — the most energy-intensive part of this market — is an excellent example that illustrates the importance of cross-border coordination: in the face of country-specific bans, the negative externalities of crypto-mining have simply been transferred from one geography to another, with the overall negative impact on the environment remaining the same.

Exploring benefits

Despite challenges, there are aspects of decentralised finance that hold promise for financial markets more broadly. We should seek to identify and learn from the parts of these markets that can help improve productivity in traditional financial market infrastructure (eg. atomic settlement; smart contracts; programmability).

While there remains work to be done, we are seeing regulatory progress across the world. For instance, the recent consultation for a regulatory regime for cryptoassets in the UK; and at the G20 level, the FSB framework for international regulation of cryptoasset activities. Embracing technological progress and innovation while ensuring relevant safeguards can benefit consumers and markets alike. It is our duty to ensure this outcome.