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

A regulator weighs an outright ban on unbacked crypto assets. Which is the most significant practical drawback of a ban, as emphasised in the IMF's discussion of regulatory approaches?

Enforcement is the main weakness. Crypto assets are borderless, pseudonymous and can be traded peer-to-peer or offshore, so bans are hard to police and may push activity underground, reducing supervisors' visibility and investor protection.

  1. ABans increase the volatility of fiat currencies
  2. BBans are difficult to enforce given crypto's cross-border, pseudonymous and decentralised nature, and may push activity undergroundCorrect
  3. CBans automatically convert crypto assets into securities
  4. DBans require banks to hold more capital against crypto

Explanation

The key concern is enforceability: crypto can be accessed through peer-to-peer and offshore platforms, so a ban may merely drive activity out of sight, reducing visibility for authorities and consumer protection. The other options describe effects that do not follow from a ban.

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