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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 deciding whether to apply a dedicated regulatory framework to unbacked crypto assets such as bitcoin. Which feature of these assets most directly explains why they are treated as a distinct policy concern rather than as ordinary financial instruments?

Unbacked crypto assets have no issuer liability, reserves or cash flows supporting their value, so prices depend on sentiment and adoption. This makes them highly volatile and hard to fit into existing frameworks, which is why they attract a distinct regulatory response.

  1. AThey have no underlying issuer liability or reserve asset, so their value rests only on market sentiment and network adoptionCorrect
  2. BThey are always issued by regulated banks, so supervisors already hold full information on them
  3. CThey pay a guaranteed fixed coupon that exposes holders to interest rate risk
  4. DThey are denominated only in the domestic currency, which limits cross-border use

Explanation

Unbacked crypto assets are not a claim on any issuer and have no reserve or cash flows to anchor value. Prices are driven by sentiment and adoption, which creates volatility and investor protection concerns. The other options describe features these assets do not have.

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