China’s central bank has urged global financial authorities to regulate both the digital asset and decentralized finance (DeFi) markets, as stated in its recent financial stability report. Released on December 22, the People’s Bank of China’s report outlines a regulatory framework for both local and international financial watchdogs to establish new rules and policies. The primary aim is to safeguard investors and all stakeholders in these markets.
According to the report, virtual assets currently make up 1% of the global financial market, with a relatively limited connection to traditional finance. Analysts emphasized the need for a global approach to ensure stability in these emerging markets. The call for regulation reflects the Chinese authorities’ concern for investor protection and the broader stability of the financial ecosystem in the face of the growing influence of digital assets and DeFi platforms.
Mixed financial markets are inevitable
Several commentators predict increased exposure of traditional finance to digital assets in the upcoming years, as more products become mainstream in the financial sector. Notably, large financial institutions are leading the way in the tokenization of real-world assets, employing blockchain as a technical solution.
The entrance of institutional investors into the market through wealth managers and digital asset funds is a significant indicator of a potential strong future partnership between traditional finance and the digital asset space.
Anticipation of the approval of a spot Bitcoin exchange-traded fund (ETF) by the United States Securities and Exchange Commission (SEC) has been a major driver for institutional investors in traditional finance. If approved, this ETF could open a new window for traditional finance funds to flow into decentralized finance (DeFi) markets, creating a beneficial cycle.
A recent report, highlighted by blockchain reporter Colin Wu on X (formerly Twitter), signifies the growing importance of the digital asset market, with a separate section dedicated to it for the first time. This reflects the increasing recognition of digital assets as a distinct and significant component within the broader financial landscape.
Global regulatory pressure on markets
In the current year, financial regulators have taken a prominent role in releasing policy frameworks to guide the development of the sector. The report identifies incidents involving Terra and FTX as significant reasons why rules need to be established, ensuring complete compliance from web3 firms to protect users.
To prevent regulatory arbitrage, the document recommends collaboration among central banks in creating universal laws applicable in all jurisdictions. It emphasizes the principles of “same business, same risks, same supervision” to reduce fragmentation.
The European Union has set a precedent with regional regulations, notably with the passage of the Markets in Crypto Assets (MiCA) regulations. These regulations aim to bring uniformity to the market, spanning from registrations to execution.
The report urges other jurisdictions, such as the United States, to follow suit in establishing clear regulations. This is to avoid the proliferation of lawsuits by local authorities and regulatory actions by courts, which currently remain uncertain, thereby potentially weakening investors’ confidence in the market.
