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

A regulator observes that a large share of retail crypto trading volume is on platforms in offshore jurisdictions, and many tokens are listed without disclosure standards. Which risk management conclusion is most consistent with the market structure of unbacked crypto assets?

Because crypto platforms operate across borders and can move to lenient jurisdictions, regulatory arbitrage is a major risk. Effective regulation therefore needs international coordination and consistent standards rather than purely national measures.

  1. ACross-border fragmentation enables regulatory arbitrage, so effective regulation requires international coordination and consistent standardsCorrect
  2. BOffshore listing eliminates investor protection concerns because of competition
  3. CDisclosure standards are unnecessary because tokens have no issuer liability
  4. DNational regulation alone is sufficient since crypto markets are fully domestic

Explanation

Crypto markets are global and operate 24/7, so platforms can relocate to lenient jurisdictions. This makes national rules easy to evade, calling for coordinated international standards. The other options ignore this arbitrage and the investor protection gap that lack of disclosure creates.

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