FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A emerging-market central bank is considering how to respond to rapid growth in unbacked crypto assets such as Bitcoin. Policymakers describe three broad strategies: banning, containing, and regulating. Which description best fits a 'containment' strategy?
Containment limits the links between crypto markets and the traditional financial system, for example by restricting regulated institutions' exposures, so that crypto risks do not spill over. It differs from a ban, which prohibits activity outright, and from full regulation of crypto activities.
- AProhibiting residents from holding or trading crypto assets altogether
- BLimiting the interconnections between crypto markets and the traditional financial system, such as restricting regulated institutions' exposuresCorrect
- CGranting crypto assets legal tender status alongside the domestic currency
- DAllowing unrestricted crypto activity with only voluntary industry codes
Explanation
Containment aims to ring-fence the crypto ecosystem so that risks do not spill over into the regulated financial system, for example by limiting bank exposures and links to traditional finance. A ban prohibits activity outright, and legal tender status is the opposite of containment.
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