The value of the LEI in the regulation of crypto assets

Written by Admin on .

Following the collapse of FTX, GLEIF CEO Stephan Wolf highlights the value of mandatory LEI use in the regulatory framework for cryptocurrency and digital asset exchanges.

Amidst all the noise caused by the collapse of the cryptocurrency exchange FTX, there is an echo of history. The calls for more transparency regarding the players behind and involved in crypto exchanges are clearly reminiscent of the calls made by the G20 some fifteen years ago after the collapse of Lehman Brothers in 2008 and the global financial crisis that followed.

Seeking a global solution to the problem of opacity in the OTC derivatives market, the G20 at the time supported the Financial Stability Board in creating GLEIF and the global LEI system. The positive impact of this decision is undeniable: more than two hundred regulations in 23 countries around the world have mandated the use of LEIs by legal entities operating in the capital markets, and more than two million LEIs are now in active use around the world and accessible to anyone interested – from regulators to curious consumers – resulting in an unprecedented level of transparency regarding the identity and ownership of legal entities everywhere.

Citizens around the world benefit from the concern for global regulation to prevent another systemic crisis.

The collapse of FTX brings into focus the possibility of using this system to achieve the same goals in the competitive cryptocurrency and digital asset trading market. If the LEI were mandated in emerging crypto regulatory frameworks around the world, as it is for OTC derivatives, the same goals could be achieved quickly, to the benefit of all parties.

Why is the LEI uniquely suited to this endeavour? First, only a uniform, high-quality and globally recognized identifier can adequately support financial stability and combat money laundering in today’s digital world with its multiple jurisdictions. The LEI fulfills these requirements. Moreover, as an open identity ISO standard, the LEI can facilitate legitimate transactions in digital assets by both service providers and crypto-asset issuers by helping them circumvent the failures of traditional marketplaces, i.e. lack of interoperability, minimal ability for financial market participants to assess risk across marketplaces, and limited ability for financial regulators to communicate about specific entities. These are precisely the shortcomings that criminals exploit in today’s financial markets to conduct illegal transactions.

Regulations in Europe

The trend towards regulation is clearest in the EU. There, the Crypto Asset Markets Regulation (MiCA) will bring crypto assets, crypto asset issuers and crypto asset service providers together in a single legal framework for the first time, with the aim of protecting the interests of consumers. This text has already been agreed but not yet officially published and is expected shortly.

Another developing area of regulation is how crypto-asset service providers should be taxed. In October 2022, the Organisation for Economic Co-operation and Development (OECD) finalized its Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard. The OECD has recognized the LEI as one of the accepted identifiers for identifying crypto-asset providers. The European Union has taken up this LEI recognition in its proposal for a Directive on Administrative Cooperation (DAC8) and introduced rules for the exchange of tax information on crypto-assets between national tax authorities.

This shows how a broader ecosystem for effective supervision of crypto-asset service providers is emerging in the EU. Service providers must identify themselves with the LEI when facilitating transactions, and it is this identifier that must be reported to the tax authorities. This will allow for easier reconciliation of tax information reported by crypto providers and easier communication between financial markets and tax authorities. GLEIF congratulates the EU on this visionary implementation and demonstration of the ecosystem that needs to evolve to enable effective oversight of crypto-asset service providers.

Regulation in the U.S.

In the US, there is no such legal framework yet. However, the responsibilities of the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFCD) are currently being discussed as to who will have oversight of the OTC market for crypto-assets when the time comes. In this case, the US has the option of using the LEI to identify crypto-asset service providers and issuers and further solidify the LEI proposal – a sign of unity between the world’s two largest financial governments. This would allow the respective authorities to easily share information on crypto-asset service providers providing services in both jurisdictions, which in turn would make an important contribution to the broader ecosystem.

The inclusion of LEIs in new policies and regulations will help to ensure that all crypto-asset service providers in the different jurisdictions are on a level playing field. Currently, there is no global way (without significant manual intervention) to determine whether the same crypto service provider is registered with multiple regulators. This creates uncertainty for both national authorities and all participants in the global financial system. If all jurisdictions identify registered crypto service providers and other intermediaries via the LEI and the LEI is exchanged uniformly between regulators, the result would be a digital financial ecosystem. This would allow for faster and more efficient supervision and a reduced compliance burden for the private sector. This is the only way to prevent regulatory arbitrage and loopholes within the global financial system.

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