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

A regulator is weighing an outright ban on unbacked crypto assets. Which is the most important practical weakness of a ban highlighted in the policy discussion?

The main weakness of a ban is enforcement. Crypto assets are borderless and can be traded peer-to-peer or through offshore platforms, so a ban can push activity underground, reducing regulators' visibility and consumer protection rather than eliminating the risks.

  1. ABans always raise the volatility of the domestic currency
  2. BBans are difficult to enforce because crypto assets are borderless and can be accessed via peer-to-peer and offshore platforms, driving activity undergroundCorrect
  3. CBans automatically give crypto issuers access to central bank reserves
  4. DBans increase the capital charges applied to banks under Basel standards

Explanation

Because crypto assets are decentralized and cross-border, users can circumvent a ban through offshore platforms or peer-to-peer trading. Activity may move out of sight, reducing the authorities' visibility and ability to protect consumers. The other options have no such mechanism.

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