Financial Stability Board Updates Risk Assessment On Crypto-Assets – Finance and Banking

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Financial Stability Board Updates Risk Assessment On Crypto-Assets

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The Financial Stability Board (“FSB”) updated its assessment of the risks to financial stability
created by crypto-assets. In the new report, the FSB considered three segments of
the crypto-asset markets: (i) unbacked crypto-assets such as
Bitcoin, (ii) stablecoins and (iii) decentralized finance and other
crypto-asset trading platforms.

The FSB reviewed the growth of the crypto-asset market over the
past few years and highlighted the public policy concerns that
arise from the lack of understanding of crypto-assets among
investors and consumers. The FSB notes the expanding links between
crypto-assets and traditional financial markets and identified some
of the structural vulnerabilities with respect to crypto markets
and stablecoins. These vulnerabilities include (i) liquidity
mismatches, (ii) credit and operational risks, (iii) susceptibility
of stablecoins to sudden and disruptive runs on their reserves,
(iv) the increased use of leverage, (v) the concentration of risk
on a few large crypto-asset trading platforms and (vi) the opacity
and lack of regulatory oversight of the crypto sector.

The FSB identified a number of areas that warrant continued
supervision and consideration for purposes of maintaining financial
stability. These include:

  • the increasing involvement of banks in the “crypto-asset
    eco-system, especially where activities give rise to balance sheet
    exposure to crypto-assets, not captured by (or not in compliance
    with) appropriate regulatory treatment”;
  • loss of confidence in stablecoins and losses in crypto-assets
    overall, particularly where such assets are tied to leverage,
    liquidity mismatch or interconnections with traditional financial
    markets;
  • regulatory arbitrage created by jurisdictional differences in
    the regulation of crypto-asset markets; and
  • the increasing adoption of crypto-assets for payments.

The FSB said it plans to continue monitoring developments and
risks in the crypto-asset markets, and exploring the regulatory and
supervisory implications of unbacked crypto-assets.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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