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CRYPTO ASSET INTERMEDIARIES

12th December, 2023 Economy

CRYPTO ASSET INTERMEDIARIES

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Context: The Financial Stability Board (FSB) has expressed concerns about crypto-asset intermediaries (CAIs), particularly multi-function crypto-asset intermediaries (MCIs), in its latest report.

Details

  • Crypto-asset intermediaries (CAIs) are businesses that facilitate the exchange, trading, and storage of crypto-assets. They play a crucial role in the crypto-asset ecosystem, providing services to both retail and institutional investors.

Key Highlights of the Report released by the Financial Stability Board  (FSB)

Cross-Border Cooperation and Information Sharing

  • The FSB emphasizes the need for enhanced cross-border cooperation and information sharing among local authorities to regulate and address gaps in the operations of multi-function crypto-asset intermediaries (MCIs) on a global scale.
  • The report highlights potential risks associated with MCIs, especially those that combine different activities within the platform. It specifically references the collapse of FTX in November 2022 as an example of such risks.

Traditional Financial Landscape v/s MCI

  • MCIs are defined as individual firms or groups of affiliated firms that offer a range of crypto-based services, products, and functions, primarily focused on operating trading platforms. Examples include Binance, Bitfinex, and Coinbase.
  • Unlike the traditional financial landscape where different entities provide various functions, MCIs combine multiple functions within the same entity. The report notes that this can lead to conflicts of interest and may impact market integrity, investor protection, and financial stability.
  • MCIs generate revenue primarily through transaction fees from trading-related activities, particularly involving self-issued crypto assets. These platforms aim to become "one-stop shops" for various crypto-based services, such as prepaid debit cards and lending.

Risk Management and Transparency

  • The report observes that most MCIs are not transparent about their corporate structure, often being privately held. Limited publicly disclosed information is available, with press coverage, court filings, and regulatory actions being the primary sources.
  • The lack of transparency is suggested to be intentional, possibly to limit understanding of vulnerabilities, economic models, and activities, thereby evading regulatory oversight.
  • The report highlights poor risk management practices among MCIs, which may make it easier for insiders to engage in misconduct. Insufficient transparency could hide risks related to governance and profitability until negative shocks occur.

Spillover Effects

  • The report notes that, based on available evidence, the threat to global financial stability and the real economy from the failure of an MCI is presently considered "limited."
  • Recent experiences with the failure or closure of "crypto-asset-friendly" banks reveal concentrated deposit exposures to firms relying on crypto assets. An example cited is Silvergate Bank, which had to wind down operations after the FTX collapse and a subsequent loss of confidence in crypto assets.

Financial Stability Board (FSB)

●The Financial Stability Board (FSB) is an international body established in 2009 by the G20 nations. It monitors and makes recommendations about the global financial system, aiming to promote financial stability.

Key Functions of the FSB:

○It helps to ensure the resilience of the global financial system by identifying and addressing vulnerabilities.

○It facilitates cooperation between national and international financial authorities to promote consistent and effective regulation.

○It plays a key role in developing and promoting global standards for financial regulation, such as the Basel III capital adequacy framework.

○It conducts research and analysis on financial stability issues to inform its policy recommendations.

●The FSB is governed by a Steering Committee, composed of senior representatives from member countries and international organizations.

Conclusion

  • The FSB's report underscores the need for regulatory attention to address potential risks associated with the operations of MCIs, emphasizing transparency, effective risk management, and cross-border cooperation among authorities.

Must Read Articles:

Cryptocurrency: https://www.iasgyan.in/daily-current-affairs/cryptocurrency-8

Financial Stability and Development Council (FSDC): https://www.iasgyan.in/daily-current-affairs/financial-stability-and-development-council-fsdc 

PRACTICE QUESTION

Q. What are the potential real-world applications and benefits of cryptocurrency in various industries, and conversely, what are the key risks and challenges that individuals and businesses might face when engaging with cryptocurrencies?