China’s Central Bank Prioritizes ‘Crypto Asset’ Regulation Amid Rising Risks

The People’s Bank of China Financial Stability Report 2023 discusses the rapid growth of the global market for crypto assets. Stressing the principle of “same business, same risks, same supervision,” the report also points to the importance of closing data gaps, decreasing fragmentation, and eliminating regulatory arbitrage.

Calls For International Cooperation For Crypto Regulation

In the report, PBC noted that France also recognizes that there are risks in the use of crypto assets. Hence, the report calls to strengthen the supervision of the domain internationally. It aims to find a forum wherein countries make unanimous decisions regarding crypto regulation.

On the other hand, the report emphasizes the obstacles associated with control (insider control), asset control (concealment of assets), and the security of data association (blockchain-off-chain). It notes that crypto assets have a low asset ratio and do not integrate with the traditional financial system.

However, frequent risk events in crypto assets, stretching from traditional asset markets to stablecoins and decentralized lending since 2022, seem to heighten volatility and speculative instincts. The report details a six-pronged strategy including access, internal control, operation, governance, exit, and supervision.

The report highlights the governance mechanisms utilized by DeFi and cautions that transparent cross-border business represents a potential global financial threat. The term “crypto assets” refers to assets that depend primarily on cryptography, and require substantive regulation to support the financial and digital environments.

Crypto assets presently account for 1% of the total global financial system. The report repeatedly suggests that the market needs cleaning up and tidying up. It suggests a thorough overhaul and reform of the registration system so that the China Securities Regulatory Commission can use a “negative feedback” mechanism to adjust market risk.

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Risks Related To Crypto Assets

Recent events of concern, such as the FTX collapse, are one reason for fluctuations in the market, the report notes. Hence, taking precautions against maturity mismatch, high leverage, and procyclicality risks is important. The report points out that there have been frequent cases of fraud in the DeFi domain this year, and calls for every department to make joint efforts to combat risks.

Recognizing the potential of dual risks in finance and digital technology, the report highlights that crypto assets are vulnerable to hacker attacks. The China central bank’s report therefore emphasizes global cooperation in forming a supervisory body to manage these cross-border characteristics effectively.

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