FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A risk manager reviews the market structure of crypto trading. Which feature of centralized crypto exchanges most clearly creates concentrated operational and conflict-of-interest risk compared with traditional regulated venues?
Centralized crypto exchanges often combine trading, custody, lending and proprietary trading in one entity. This bundling concentrates operational risk and creates conflicts of interest that traditional markets reduce by separating these functions through regulation.
- AExchanges bundle activities such as trading, custody, lending and proprietary trading within a single entityCorrect
- BExchanges only allow trading between institutional counterparties
- CExchanges settle all trades through a regulated central counterparty
- DExchanges separate custody of client assets from the matching engine by regulation
Explanation
Many crypto platforms combine brokerage, exchange, custody, market making and lending, which traditional markets typically separate. This concentrates risk and creates conflicts of interest, such as proprietary trading against clients. The other options describe safeguards that are generally absent in crypto markets.
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