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

A regulator reviewing the crypto ecosystem notes that unbacked crypto assets, such as bitcoin, have no underlying claim on cash flows or reserves. Which feature best explains why their prices are prone to sharp boom-bust cycles?

Unbacked crypto assets have no cash flows, reserves or redemption claim, so their value depends on sentiment and expectations of future demand. Without a fundamental anchor, prices swing sharply and are prone to boom-bust cycles, unlike redeemable or cash-flow-producing assets.

  1. ATheir value rests on sentiment and expectations of future demand rather than on any intrinsic cash flow anchorCorrect
  2. BTheir supply is always adjusted by a central bank to stabilise prices
  3. CThey are redeemable at par for fiat currency on demand
  4. DThey pay a contractual coupon that falls when interest rates rise

Explanation

Unbacked crypto assets have no cash flows, reserves or redemption right to anchor valuation, so prices depend on sentiment and expected future demand, which fosters boom-bust cycles. The other options describe features of central-bank-managed money, stablecoins or bonds, not unbacked assets.

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