#9 in the LEI Lightbulb Blog Series - The Value of the LEI in Crypto Asset Regulation
Following the collapse of FTX, GLEIF’s CEO, Stephan Wolf, highlights the value of mandating LEI use in regulatory frameworks governing cryptocurrency and digital asset exchanges.
Author: Stephan Wolf
Amid all the noise made by the collapse of cryptocurrency exchange, FTX, echoes from history can be heard. The calls for greater transparency into the actors behind and engaged in crypto exchanges resonate clearly with those made by the G20 some fifteen years ago, following the 2008 collapse of Lehman Brothers and the ensuing global financial crisis.
Back then, in pursuit of a worldwide solution to the problem of opacity in the Over-The-Counter (OTC) derivatives market, the G20 endorsed the Financial Stability Board to create GLEIF and the Global LEI System. The positive impact of this decision is unassailable: more than two hundred regulations across 23 jurisdictions around the world have mandated the LEI’s use by legal entities engaged in capital markets, and more than two million LEIs are now in active use globally, accessible to any interested party - from regulator to curious consumer - resulting in never-before-seen levels of transparency into the identities and ownership structures of legal entities, everywhere.
Citizens all around the world benefit from the concern of global regulation to prevent another systemic crisis.
The collapse of FTX brings into sharp focus the opportunity to use this system to achieve the same ends in the embattled market for cryptocurrency and digital asset trading. If the LEI were mandated in emerging crypto regulatory frameworks around the world, just as it has been for OTC derivatives, the same ends could quickly be achieved, to the benefit of everyone involved.
Why is the LEI uniquely suited to this endeavour? Firstly, only a consistent, high-quality, and globally recognized identifier can adequately support financial stability and tackle anti-money laundering in today’s multi-jurisdictional digital world. The LEI ticks those boxes. What's more, as an open identity ISO standard, the LEI can facilitate legitimate digital asset transactions from both service providers and crypto-asset issuers by helping them sidestep the errors made by the traditional marketplaces – those being a of lack of interoperability, minimal ability for financial markets participants to assess exposures across marketplaces, and limited ability for financial supervisors to communicate on particular entities. These are the exact shortfalls that criminals exploit in today's financial markets to carry out illicit transactions.
Regulations in Europe
Movements towards regulation is most apparent in the EU. There, the regulation on Markets in Crypto Assets (MiCA) is, for the first time, bringing together crypto assets, crypto asset issuers and crypto asset service providers under a single regulatory framework, with the ultimate goal of protecting consumer interests. This text has been agreed but not yet officially published and is expected imminently.
Another evolving regulatory area is how to tax crypto-asset service providers. In October 2022, Organization for Economic Cooperation and Development (OECD) concluded its Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard. OECD recognized the LEI as one of the accepted identifiers to identify crypto-asset service providers. The European Union mirrored this LEI recognition in its proposed Directive on Administrative Cooperation (DAC8), introducing rules for the exchange of tax information on crypto assets among national tax authorities.
This demonstrates how a broader ecosystem for effective monitoring of crypto-asset service providers is emerging in the EU. The service providers must identify with the LEI when facilitating transactions and this very same identifier must be reported to tax authorities. This enables easier reconciliation of the tax information reported by the crypto-asset service provider and easier communication between the financial markets and tax authorities. GLEIF applauds the EU for this visionary implementation and demonstration of the ecosystem that needs to develop to enable effective monitoring of crypto-asset service providers.
Regulation in the U.S.
In the U.S. there is no such regulatory framework, yet. That said, debate is ongoing concerning the responsibilities of the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFCD) over who will have regulatory oversight of the OTC crypto-asset trading market, when the time finally comes. Here, in a show of unity between the two of the world’s largest financial jurisdictions, the U.S. has an opportunity to leverage the LEI for identification of crypto-asset service providers and issuers, and further cement the LEI proposition. This would allow the respective authorities to easily share information on crypto-asset service providers that are providing services in both jurisdictions, again making an important contribution to the broader ecosystem.
Incorporating the LEI in emergent policies and regulations will help to level the playing field for all crypto-asset service providers across different jurisdictions. At the moment, there is no global way (without significant manual intervention) to determine if the same crypto-service provider is registered with multiple regulators. This leads to uncertainty for national authorities as well as all participants in the global financial system. If all jurisdictions identify registered crypto-asset service providers and other intermediaries via the LEI, and the LEI is consistently exchanged across supervisory authorities, the result would be a digitally enabled financial ecosystem. This would enable faster and more efficient monitoring as well as decreased compliance burden for the private sector. This is the only way to prevent regulatory arbitrage and loopholes within the global financial system.
The ‘LEI Lightbulb Blog Series’ from GLEIF aims to shine a light on the breadth of acceptance and advocacy for the LEI across the public and private sectors, geographies and use cases by highlighting which industry leaders, authorities and organizations are supportive of the LEI and for what purpose. By demonstrating how success derived from strong regulatory roots is giving rise to a ground swell of champions for further LEI regulation and voluntary LEI adoption across new and emerging applications, GLEIF hopes to educate on both the current and future potential value that ‘one global identity’ can deliver for businesses, regardless of sector, world-wide.
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Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). In 2021, he was appointed to an all-new Industry Advisory Board (IAB) as part of the International Chamber of Commerce’s (ICC) Digital Standards Initiative (DSI). In that capacity, he serves as co-chair of the workstream on ‚Trusted Technology Environment‘. Between January 2017 and June 2020, Mr. Wolf was Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO. Mr. Wolf holds a university degree in business administration from J. W. Goethe University, Frankfurt am Main.