Next week could prove a turning point in the global regulation of crypto finance – and ministers from the world’s 20 biggest economies will potentially confront the system change posed by decentralized finance (DeFi).

The Financial Stability Board (FSB), a global watchdog, will set out plans for regulating crypto markets by the middle of next week – and it may have to consider whether to carry on sharpening the tools it already has in its toolbox or go in a whole new direction to rein in the ecosystem of decentralized finance (DeFi).

The FSB has an influential role in setting international norms – it wrote the current rulebook for financial markets in the wake of the 2008 financial crisis. Back in July it set out its crypto agenda, in the form of two consultations which it wants to present to G20 finance ministers ahead of a meeting next Wednesday and Thursday in Washington.

Many markets suffer from volatility – but the FSB is really worried about crypto instability filtering through to up-end the conventional financial system. That could happen, for example, if the instability undermines general investor confidence, if it affects short-term financing markets like money-market funds or if people started widely using a stablecoin to pay for everyday goods.

It’ll revisit its existing norms on stablecoins – crypto assets that seek to maintain their value with respect to fiat currency – which it first issued back in October 2020. FSB will also submit another draft report for “promoting international consistency of regulatory and supervisory approaches to other crypto-assets and crypto-asset markets” – something that could extend much further into the Web3 ecosystem.

The FSB’s existing norms on stablecoins are high-level, urging countries to ensure major stablecoins are included within regulatory oversight – and even those recommendations have seen patchy take-up.

Read more: Global Financial Watchdog FSB to Propose Crypto Regulations in October

But there are a number of reasons to think this time round the standards will be both tougher – and better heeded.

The market has changed since 2020, when the main threat was the incursion of the Big Tech player then known as Facebook (now Meta), via its backing for the stablecoin it was developing, then known as libra (later diem, subsequently scuttled). This time real-life assets like tether (USDT) have become much bigger. They haven’t yet taken over the financial system, as some worried Facebook might do, but they pose risks of their own. The dramatic collapse of stablecoin terraUSD earlier this year vindicated many of the things the FSB had been seeking, such as the need to have a decent stabilization mechanism and keep proper reserves.

That suggests the FSB might not just review its stablecoin rules, but rewrite them.

Plus the FSB’s two most muscular members, the U.S and the EU, are now starting to act. They will likely want others to follow suit – to avoid crypto companies, as they see it, stealing their business by offshoring to less-regulated climes. (China, the G20’s other major economy, may well simply sit this one out, having more or less opted not to control crypto but to ban it.)

In the U.S., regulators have spent recent weeks issuing their own series of reports – requested by President Joe Biden – outlining how they intend to approach crypto. The Financial Stability Oversight Council this week cited the urgent need for stablecoin oversight and a regulator for non-security tokens like bitcoin (BTC). Clear guidance from the FSB could give a nudge to Congress, currently too bogged down by the end of the current legislative session and midterm elections to push on with legislation.

The EU, finalizing its own Markets in Crypto Assets regulation, MiCA, is now looking to ensure that others are keeping up. Among the first public remarks she made after a deal was struck on MiCA back in June, the European Commission's financial-services chief, Mairead McGuinness, told CoinDesk she was hoping for greater international cooperation on crypto.

The EU lawmaker who led talks on the regulation, Stefan Berger, appears to agree with her.

“The EU will become a global standard-setter,” thanks to MiCA, Berger tweeted on Wednesday, suggesting he’d seen considerable interest in the law from people in the U.S. on his recent trip there.

Policymakers are certainly hyping what the FSB could deliver.

“In 2023, we will have a global, consistent and comprehensive framework to tackle crypto-assets,” French central bank Governor François Villeroy de Galhau said in a speech given in September, referring to the forthcoming norms.

And that framework could prove a boon to some in the industry. Take the case of Ripple, which is currently attempting to fight against a legal case mounted by the U.S. Securities and Exchange Commission alleging the XRP cryptocurrency is a security that should have been federally registered by Ripple.

That kind of regulatory uncertainty offers companies an unwelcome and unhelpful surprise, Ripple’s head of policy, Sue Friedman, told CoinDesk, and an international framework could help.

“We certainly don't want to create an ecosystem where an asset is considered a non-security in one jurisdiction but is blocked as a security in another,” Friedman said in an online interview.

“I don't think that they [the FSB] are going to go so far as to actually say what they consider a security versus what is not,” she added. “I fully expect a call for higher standards and international coordination, and we believe it makes a lot of sense.”

Yet it’s not immediately clear how the FSB will do that – thanks, in part, to the emergence of transformative technologies like DeFi .

Existing crypto laws largely extend existing financial rules, under the mantra of “same activity, same risk, same regulation.” That means stablecoin issuers have to prudently manage assets, and crypto wallet providers check the identity of their customers, just as banks must.

The aim of regulation should be “holding crypto assets, including stablecoins, to the same standards as the rest of the financial system,” the group of the world’s seven largest developed democracies said in May, apparently supporting a continuation of that steady-as-she-goes approach.

Yet piling obligations on regulated intermediaries may not be possible if there is no single entity responsible – say, because lending is done by a software protocol rather than a bank. The traditional approach may also miss the point given the novel – and inherently cross-border – risks involved in DeFi.

Supervisors in traditional finance obsessively monitor the balance sheets of huge banking or insurance behemoths. In DeFi, the individual entities involved may be much smaller, and the collapse of any one is unlikely to bring down the financial system – yet there are other threats, like that a single software bug could spiral out of control.

Read more: International Regulators Struggle With How to Oversee DeFi

That was certainly the conclusion of the Financial Stability Institute's Fernando Restoy back in September, when he suggested a wholescale rethink to deal with DeFi. His argument has since been echoed by John Berrigan, the Brussels official who runs the European Commission’s financial-services department.

“The intermediary in decentralized finance may not be something that you can regulate via behavioral incentives,” Berrigan said in an interview published by the commission Sept. 30. “It is a huge challenge and it will probably require some reflection – not just on the procedures for how we regulate, but on the essence of the regulations.”

Not everyone is so convinced there’s anything truly transformational about DeFi. Decentralization is often an “illusion” because consensus mechanisms often still involve a concentration of power, and there’s normally some kind of body in the middle on which regulatory obligations can be pinned, argued the Bank for International Settlements in December.

Faced with that skepticism, the FSB’s foray into DeFi seems likely, for the time being, to be tentative.

Jesse Hamilton contributed reporting.

UPDATE (Oct. 9, 2022, 07:00 UTC): corrects name of Ripple cryptocurrency