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

A central bank official argues that widespread household use of unbacked crypto assets in an emerging economy could weaken the authorities' macroeconomic tools. Which concern is she most likely raising?

The concern is that crypto can substitute for domestic currency and help evade capital flow controls, weakening monetary policy transmission and capital flow management. This macro-financial risk is a key reason authorities regulate unbacked crypto assets, especially in emerging economies.

  1. ACrypto-assisted substitution away from domestic currency and capital flow circumvention could undermine monetary policy and capital flow managementCorrect
  2. BCrypto adoption automatically raises the central bank's foreign reserves
  3. CCrypto holdings reduce the volatility of domestic inflation by construction
  4. DCrypto use eliminates the need for bank supervision

Explanation

If residents hold crypto instead of domestic currency, or use it to move funds abroad, monetary sovereignty and capital flow measures weaken. The other options are not effects supported by the reading and are not plausible policy concerns.

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