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FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets

A central bank in an emerging economy is considering how to respond to rapid growth in unbacked crypto assets such as Bitcoin. Under the IMF's policy framework for unbacked crypto assets, which of the following best describes a 'containment' approach?

Containment means limiting links between crypto markets and the regulated financial system, such as restricting bank and institutional exposures. It differs from an outright ban, which prohibits activity, and from regulation, which brings activities under rules, because it ring-fences traditional finance from crypto-related risks.

  1. AProhibiting all residents and financial institutions from holding or trading crypto assets
  2. BLimiting the linkages between crypto markets and the regulated financial system, for example by restricting banks' and institutional investors' exposuresCorrect
  3. CGranting crypto firms full licences identical to those of banks in exchange for disclosure
  4. DIssuing a central bank digital currency to replace all private crypto assets

Explanation

Containment aims to ring-fence the regulated financial sector from crypto-related risks by limiting exposures and interconnections, without banning the assets outright. A ban is the most restrictive option, while full licensing as banks is not containment.

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