FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A risk manager examines crypto market structure. A single platform acts as exchange, broker, custodian and proprietary trader for customers. Which risk is most directly heightened by this combination of functions?
Conflicts of interest and commingling of customer assets are most heightened. Combining exchange, broker, custodian and proprietary trading in one platform removes the separation used in traditional finance, creating opaque asset use, misconduct risk and a single point of failure that can trigger runs under stress.
- AConflicts of interest and commingling of customer assets, amplifying run and misconduct riskCorrect
- BReduced counterparty concentration because functions are diversified
- CLower operational risk because of a single point of control
- DElimination of settlement risk through atomic settlement
Explanation
Bundling intermediary functions that are separated in traditional finance creates conflicts of interest, opaque use of customer assets and a single point of failure. This raises misconduct and run risk when the platform faces stress. Bundling concentrates rather than diversifies exposure, and does not remove settlement risk.
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