Standards and Transparency: The missing piece?

Note: This post was originally published on LinkedIn in Feb 2024
 
Last week FATF held their fifth Plenary. [https://lnkd.in/dA_eiTVc]. As usual the media quickly caught onto changes to the Grey List - congratulations to Barbados, Gibraltar, Uganda and the UAE.

Without getting distracted by this, inclusion in the Grey List matters. In the case of the UAE for more empirical evidence I would recommend this excellent post by John Cusack [https://lnkd.in/dAEQpWtx]. See also (JMLSG Para 5.5.11).

What received less coverage were the announcements relating to FATF Recommendation 15: New Technologies (which covers Virtual Assets (VA) and Virtual Asset Service Providers (VASPs). The Plenary agreed to publish an overview of the steps that FATF jurisdictions have taken with the most materially important VA activity, based on trading volume and user base, to regulate and supervise VASPs.
Last comparative update on VASPs across different jurisdictions is:[https://lnkd.in/d-5eCaJn] Table 1.2 gives a nice breakdown of the methodology – including a risk-based approach.

So why does this matter? Because many firms active in these ‘New Technologies’ do not have the same robust procedures in place that we are familiar with in TradFi. For example in TradFi, if you want to make a relative comparison across CCPs, not only are the principles defined, the obligation for transparency is also prescribed. [Public quantitative disclosure standards for central counterparties (bis.org)]. In contrast this level of transparency has not yet been adopted by VASPs. Which VASPs are offering leverage (which is implausible for a TradFi CCP), what does the default waterfall look like, what are the default assets?

The Federal Reserve has also conducted some excellent research on the structure and performance of stablecoins [https://lnkd.in/dyisedXT] during stress market conditions (e.g the stablecoins that may be used in a VASP SAFU). One of their conclusions is “empirical analysis suggests that decentralized and centralized exchanges operate differently during times of crisis”.

✔ Understanding that our customers have much higher thresholds to cross was one reason why we chose the UK to establish our regulatory footprint (read avoid the Grey List).
✔ Being mindful that our customers want certainly and recourse to known assets (think Fed) and uniform and predictable structures (think IOSCO Principles for financial market infrastructures) is another.
✔ Appreciating that our customers are also attuned to whom they pool their risks with (think the weakest link) is why we have a regulated CCP model.