Global regulation of crypto assets is well underway. The task now is to ensure consistent implementation. Only then will market forces produce real, sustainable innovations. A brief commentary by Rupert Schaefer, BaFin's Chief Executive Director of Strategy, Policy and Control.

The scenario is every pilot's nightmare: the sky around you is full of planes flying with no registration marks, no radio communications – and with no regard for the rules of the sky. Orderly air traffic is impossible, and the safety of your passengers is in jeopardy.

A similar nightmare can play out on financial markets: some crypto assets and decentralised finance projects certainly have plenty in common with unidentified flying objects. As financial supervisors, we sit in the air traffic control tower. It is our duty to recognise the characteristics of these assets, to understand them, to know their route and, if necessary, to intervene. This is the only way we can guarantee safe and orderly aviation, setting the stage for market participants to benefit from distributed ledger technology (DLT) over the long haul.

The insolvency of cryptocurrency exchange FTX demonstrated the havoc that substantial deficiencies can wreak in on-board systems. FTX was not the first crypto provider to crash, nor will it be the last. The traditional financial system has barely been affected up to now. That may change, though, as more and more financial players join the crypto market, causing the dynamics in our airspace to shift.

We therefore need to establish clear, appropriate rules for crypto markets – only then can we build trust in these cutting-edge digital financial products.

For more integrity and investor protection

We have made progress in our international regulatory efforts in recent months. The European Union has taken an important step forward with its MiCA Regulation, which has drawn international attention. The next step will be to develop and adopt technical standards in order to implement the regulation.

The Financial Stability Board’s (FSB) principles-based recommendations on crypto assets, which focus on financial stability risks and draw important lessons from past upheavals and scandals, serve as a common foundation that can be applied internationally.

The International Organization of Securities Commissions (IOSCO) advocates for more integrity and investor protection on crypto markets. In May of this year, it published its corresponding Policy Recommendations for Crypto and Digital Asset Markets. We support these recommendations, as they lay the international foundation for fair and efficient markets in crypto assets worldwide.

Other key players in this field include the Financial Action Task Force, the most important international standard-setter for combating money laundering and strengthening market integrity in the field of virtual assets, and the Basel Committee, which is set to establish more uniformity with its new international regulatory standard on the prudential treatment of crypto asset exposures. BaFin participated in the development process, and we welcome the new standard.

Relevant international regulatory principles have thus been adopted, and the framework is in place. The next step is to ensure that all countries consistently implement these collective principles. There must be no blind spots on the flight radar: the global rules need to apply in niche financial centres, as well.

Our policy at BaFin is clear: only companies with a plausible business model, sufficient start-up capital and management that is reliable, responsible and identifiable will receive an authorisation from us. We take supervisory standards seriously, and we cannot allow offerors with potentially dubious business models and lax compliance to operate in Germany via unregulated online platforms. In other words, we cannot leave the task of assessing the quality and reliability of the plane, crew and flight route to the passengers. This is the only way to ensure a level playing field and an orderly airspace in which all passengers feel safe, no matter how far the journey.