Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets: formula sheet

Key formulas

Leverage multiple

Leverage = Position size ÷ Equity (margin)

A position of 10 times equity is wiped out by a 10% adverse move, ignoring fees and margin buffers.

Liquidation price (long)

Liquidation price ≈ Entry price × (1 − 1 ÷ Leverage)

Simplified; real platforms add maintenance margin, so liquidation happens earlier.

Levered return

Return on equity ≈ Leverage × Asset return

Leverage magnifies gains and losses equally. Ignores funding costs.

Harm-to-objective mapping

Retail losses → investor protection; fraud and manipulation → market integrity; illicit use → AML/CFT; interconnection and runs → financial stability

There is no numeric formula here. Use this mapping to structure answers.

Regulatory principle

Same activity + same risk = same regulation

This is the technology-neutral principle. It guards against arbitrage between crypto and traditional finance.

Perimeter logic for DeFi

No central entity → regulate access points (on-ramps, front-ends, intermediaries, stablecoin issuers)

Used when no legal person controls the protocol.

Ban

Prohibit holding, trading or service provision

Strength: clear signal. Weakness: hard to enforce, may push activity offshore or underground and reduce visibility.

Containment

Limit links between crypto and regulated finance

Protects banks, insurers and payments from contagion. Does not protect retail users directly and does not regulate the crypto market itself.

Regulation

Licensing + conduct + prudential + AML/CFT rules for service providers

Aims at investor protection and market integrity. Needs supervisory capacity and cross-border cooperation.

Policy matching rule

Risk identified → objective → tool → residual gap

Use this chain to justify any recommendation. Approaches can be combined.

Guiding principle

Same activity + same risk = same regulation

Technology-neutral. Crypto activity that looks like banking or securities activity should face comparable rules.

Five domestic building blocks

Perimeter → Licensing → Disclosure → Custody → Prudential

Use this checklist to classify any rule in a question.

Who sets what

FSB = coordination; IOSCO = markets and investors; Basel Committee (BIS) = bank capital; FATF = AML/CFT

Most MCQs test matching the body to the task.

Travel rule data flow

Originator VASP → sends originator and beneficiary information → Beneficiary VASP

Same purpose as bank wire transfer information. Aim: traceability and sanctions screening.

Nature of global standards

Standard setter issues recommendation → national authority implements → peer review of gaps

Recommendations are not binding until adopted domestically.

Quick revision

• Unbacked crypto assets have no underlying asset or issuer claim behind their value.
• Stablecoins are a different category and aim to hold a stable value against a reference asset.
• Prices are driven largely by sentiment and speculation, so volatility is high.
• Market participants include trading platforms, custodians, wallet providers and decentralised protocols.
• Key risk themes: volatility, leverage, runs and illiquidity, fraud, hacks, weak custody and opaque disclosure.
• Market failures cover information asymmetry, conflicts of interest in integrated platforms, and weak governance.
• Main policy objectives: investor and consumer protection, market integrity and financial stability.
• Three approaches: ban, contain and regulate.
• Banning can push activity underground or abroad and is hard to enforce on borderless markets.
• Containing limits links between crypto and the traditional financial system, for example by restricting bank exposure.
• Regulating brings activity inside a framework with rules on licensing, disclosure, custody and conduct.
• Cross-border activity creates regulatory arbitrage, so international coordination and consistent standards matter.

Common mistakes

• Calling Bitcoin a stablecoin or saying it is backed by reserves. Fix: Unbacked means no issuer claim and no underlying asset. Value comes from market demand alone.
• Treating a tokenised bond as an unbacked crypto asset because it sits on a ledger. Fix: Classify by what the holder is owed. A tokenised bond is a claim on the bond, so it is not unbacked.
• Saying unbacked crypto is already a major systemic threat. Fix: State that links to traditional finance are currently limited but could grow, so the risk is potential and rising.
• Treating stablecoins and unbacked assets as the same. Fix: Unbacked assets have no claim or reserves. Stablecoins claim to be backed and carry run and reserve risks.
• Saying regulation exists because crypto is already a major systemic threat to banks. Fix: Say regulation is partly preventive. Risks grow with scale, leverage and links to traditional finance.
• Treating all unbacked crypto assets as having an issuer to regulate. Fix: For decentralised assets and DeFi, there may be no issuer. Regulate intermediaries and access points.
• Treating containment as a form of ban. Fix: A ban prohibits the activity itself. Containment allows it but separates it from banks, payments and regulated investors.
• Assuming regulation protects the financial system from all crypto risk. Fix: Regulation covers service providers it can reach. Offshore platforms and decentralised activity can fall outside it, so gaps remain.
• Saying FATF sets capital rules for banks holding crypto. Fix: FATF is AML/CFT only. Bank capital belongs to the Basel Committee.
• Treating FSB or IOSCO recommendations as binding law. Fix: They are recommendations. Binding force comes only from national implementation.

Exam tips

• Always start with the claim test. Most classification questions turn on whether an issuer owes the holder something.
• Do not classify by technology. Being on a ledger does not make something unbacked.
• Watch for options that give Bitcoin stablecoin features such as redemption or reserves. They are wrong.
• Link structure to risk: no anchor gives volatility, and combined roles at one firm give conflicts and concentration.
• Match participants to their one core function before reading the answer choices.
• Match each risk to its mechanism. Questions often ask which risk a specific feature creates.
• Reject absolute statements such as 'crypto poses no risk to stability' or 'is already systemic'.
• For leverage numbers, use Leverage × price move and check against 100% of equity.