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

A national authority wants to regulate unbacked crypto assets such as Bitcoin. A staff member proposes that, because these assets are issued by no identifiable entity and are not backed by claims on any asset, the authority should rely mainly on rules for the intermediaries and service providers (exchanges, wallets, brokers) rather than on rules for an issuer. Which feature of unbacked crypto assets best supports this proposal?

Unbacked crypto assets have no identifiable issuer and no underlying claim, so there is nothing to supervise at the issuer level. Regulators therefore attach rules to the exchanges, wallet providers and other intermediaries that give users access to them.

  1. AThey have no issuer or underlying claim that can be supervised, so the regulatory perimeter must attach to the entities that provide access and servicesCorrect
  2. BThey are always fully collateralized by high-quality liquid assets held by the issuer
  3. CThey are legal tender in most jurisdictions, so central banks already supervise them
  4. DThey are issued by regulated banks whose prudential rules already apply

Explanation

Unbacked crypto assets lack a central issuer and any asset backing, so there is no issuer to regulate. Policy therefore targets the intermediaries and service providers at the points where users access the ecosystem. The other options describe features that unbacked assets do not have.

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