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

A country's authorities are weighing a regulatory response to unbacked crypto assets. They want to prevent crypto losses from transmitting to the banking sector but do not want to prohibit retail ownership. Which measure is most consistent with this objective?

Imposing conservative prudential treatment, such as high risk weights or exposure limits on bank crypto holdings, best meets the objective. It contains transmission of crypto losses to the banking system while still permitting private holdings, unlike legal tender status, HQLA recognition or subsidies, which deepen linkages.

  1. AImposing a conservative prudential treatment, such as high risk weights or exposure limits, on banks' crypto holdingsCorrect
  2. BMaking crypto assets legal tender
  3. CAllowing banks to hold unlimited crypto reserves as high-quality liquid assets
  4. DSubsidising crypto exchanges to improve liquidity

Explanation

Conservative prudential treatment and exposure limits for banks contain contagion while leaving private ownership permitted. Legal tender status and HQLA treatment increase linkages, and subsidies promote rather than limit crypto activity.

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