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

A jurisdiction has banned banks from crypto exposures, yet retail investors can still buy unbacked crypto on offshore platforms. A risk officer assesses residual risks. Which conclusion is best supported by the 'ban, contain, regulate' discussion?

Residual risks remain after banks are insulated. Retail losses, illicit finance, non-bank interconnections and wealth effects persist, so disclosure, AML controls and monitoring are still needed alongside the exposure restrictions.

  1. AFinancial stability risk is eliminated because banks are insulated, so no further measures are needed
  2. BConsumer protection, illicit finance and indirect channels such as wealth effects and non-bank links remain, so complementary measures such as disclosure, AML rules and monitoring are still neededCorrect
  3. COnly monetary policy transmission is affected, so macroprudential tools are irrelevant
  4. DRetail losses cannot affect the real economy under any circumstances

Explanation

Insulating banks addresses one channel only. Retail losses, illicit flows, leverage through non-banks and sentiment effects can persist, so complementary tools such as AML and consumer protection remain necessary. The first option wrongly treats containment as complete, and the others are overstated.

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