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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 market observes that residents increasingly hold unbacked crypto assets as a store of value to avoid local currency depreciation and capital flow controls. Which pair of policy concerns does this behavior most clearly raise?

Residents shifting into crypto to escape depreciation and controls can circumvent capital flow management measures and weaken monetary policy effectiveness through currency substitution. This is a macro-financial rationale for regulation beyond consumer protection.

  1. ACircumvention of capital flow management measures and erosion of monetary policy effectivenessCorrect
  2. BHigher bank deposit insurance premiums and lower sovereign yields
  3. CReduced settlement risk and improved transparency
  4. DLower inflation expectations and stronger exchange rate stability

Explanation

Using crypto to move value abroad can bypass capital controls, and substitution away from domestic currency can weaken monetary policy transmission and sovereignty. The other options describe benefits or unrelated effects.

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