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

A regulator is drafting a policy for unbacked crypto assets such as Bitcoin. Which of the following best describes the central reason the IMF reading gives for why these assets raise concerns for authorities, as distinct from stablecoins?

Unbacked crypto assets lack any issuer liability or reserve assets behind them, so their value rests on sentiment and speculation. This makes them highly volatile and risky for investors and potentially for stability, which is why authorities seek to regulate them.

  1. AThey have no underlying issuer liability or asset backing, so their value depends on market sentiment and they can be highly volatileCorrect
  2. BThey are always issued by regulated banks, which creates concentration risk in the banking sector
  3. CThey are guaranteed by central banks, which creates moral hazard
  4. DThey pay a fixed coupon that exposes holders to interest rate risk

Explanation

Unbacked crypto assets have no claim on an issuer or reserve assets, so prices are driven by sentiment and speculation, producing volatility and risks to investors and potentially financial stability. The other options describe features they do not have.

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