The People’s Bank of China released a financial stability report urging global financial authorities to regulate digital assets and decentralized finance (DeFi) markets.
Focus on Gaining Stability
The report, released on December 22, outlines a regulatory framework for both local and international financial watchdogs to protect investors. While virtual assets currently make up 1% of global finance with minimal connection to traditional finance, analysts advocate for a global approach to ensure stability as tokenization of real-world assets increases.
Growing Institutional Interest
Institutional investors’ increasing participation in the crypto market via wealth managers and digital asset funds indicates potential partnership with traditional finance. Regulators aim to capitalize on this by creating an enabling environment through robust policies. A key incentive for traditional finance to invest in DeFi is the anticipation of an SEC-approved spot Bitcoin ETF.
Need for Regulation after Major Incidents
The report marks the first time China dedicates a section for crypto under the principle of “same business, same risks, same supervision.” Recent market incidents with Terra and FTX cited as reasons needing regulations to protect users. The report calls for central banks to collaborate on laws to prevent regulatory arbitrage and apply consistent supervision across jurisdictions. The EU’s Markets in Crypto Assets (MiCA) are seen as a model to create market uniformity.
The U.S. is encouraged to adopt similar regulations to prevent legal uncertainty and strengthen investor confidence.China’s stance on crypto appears to be evolving from a total ban to regulatory cooperation, especially with activities in Hong Kong.