LEI number: A crucial tool for the regulation of crypto assets

18 May 2023

Amidst the turmoil caused by the collapse of cryptocurrency exchange FTX, Stephan Wolf, CEO of GLEIF, highlights the crucial role of the Legal Entity Identifier (LEI) in regulating crypto assets. The discussion about the need for a more robust regulatory framework for digital asset trading is strongly reminiscent of the calls for more transparency made after Lehman Brothers’s collapse in 2008.

Why the LEI is essential for crypto assets

Since its introduction, the LEI (Legal Entity Identifier) has established itself as a globally recognised identifier for legal entities. With over two million active LEIs worldwide, it is now an indispensable tool for ensuring transparency and avoiding opacity in the global financial system. Given the challenges in the cryptocurrency market, introducing the LEI into the crypto regulatory framework could have similar positive effects as in the traditional financial sector.

Uniform, high-quality, and globally recognised identifiers such as the LEI are crucial to supporting financial stability and facilitating the fight against money laundering in the digital world. As an open ISO identity standard, the LEI can support legitimate digital asset transactions by service providers and issuers. This would help address shortcomings such as lack of interoperability and limited communication between market participants and regulators.

Regulatory progress in Europe

Significant progress can be seen in the EU’s regulation of crypto-assets. The forthcoming Markets in Crypto Assets Regulation (MiCA) will create a comprehensive regulatory framework for crypto assets, their issuers and service providers for the first time. The LEI plays a central role in this framework, as it will be used to identify service providers, leading to increased transparency and better supervision.

The taxation of providers of crypto-asset services will also be increasingly regulated. The OECD has recognised the LEI as one of the accepted identifiers for identifying crypto-asset service providers, and the EU has adopted this in its proposed Directive on Administrative Cooperation (DAC8). These developments show how a comprehensive regulatory ecosystem in Europe relies on the LEI to optimise the oversight of crypto-asset service providers.

The situation in the USA

While a similar regulatory framework is still under discussion in the US, the debates between the SEC and the CFDC over responsibilities for the crypto OTC market provide an opportunity to introduce the LEI as a central identifier. Such an introduction would not only facilitate regulatory work but also help to close loopholes in the global financial system and increase the efficiency of market surveillance.

Conclusion

The LEI could play a central role in regulating crypto-assets, similar to what it already does in the traditional financial market. Its introduction into crypto regulation worldwide could significantly increase transparency and trust in this fast-growing sector. This would support the financial system’s stability, ease the burden on the private sector, and make the global economic landscape safer.