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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 IMF discussion of unbacked crypto assets (such as Bitcoin) is asked why these assets cannot be valued using standard discounted cash flow methods. Which statement best reflects the reading's reasoning?

Unbacked crypto assets are not claims on an issuer and produce no cash flows, so there is no fundamental value to discount. Prices are driven by sentiment and speculation, which is why standard DCF valuation does not work for them.

  1. AThey generate no underlying cash flows and are not a claim on any issuer, so their price depends on expectations and sentiment rather than fundamentalsCorrect
  2. BThey pay a fixed coupon that is too volatile to forecast
  3. CThey are always backed by a basket of fiat currencies whose weights change daily
  4. DThey are valued by central banks using a policy-rate formula

Explanation

Unbacked crypto assets have no issuer, no cash flows and no reserve of underlying assets. Their value is driven by sentiment and speculative demand, which makes fundamental valuation impractical. The other options describe features that these assets do not have.

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