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

A national authority is debating whether to regulate unbacked crypto assets such as bitcoin. A staff paper notes that these assets have no underlying cash flows and no issuer liability backing their value. Which feature of unbacked crypto assets most directly supports the case for regulatory intervention on investor-protection grounds?

Unbacked crypto assets have no underlying cash flows or issuer claim, so prices depend on sentiment and speculation. This volatility can inflict large losses on retail holders, which is a central investor-protection reason for regulating them.

  1. ATheir price is driven largely by sentiment and speculation, exposing retail holders to sharp lossesCorrect
  2. BTheir issuance is always controlled by a single central bank
  3. CThey are denominated in the domestic currency of the regulator
  4. DThey pay a guaranteed fixed coupon that investors misunderstand

Explanation

Unbacked assets lack intrinsic cash flows or a claim on an issuer, so valuation depends on sentiment, producing high volatility and potential retail losses. That is a core investor-protection rationale. The other options describe features that unbacked crypto assets do not have.

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