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

A risk officer at a bank reviews a regulator's proposal to ban unbacked crypto activity entirely. Which of the following is the most significant drawback of a comprehensive ban relative to containment and regulation?

The main drawback is enforcement difficulty: crypto is cross-border and pseudonymous, so a ban can push activity offshore or underground, where authorities have less visibility and consumers have less protection. This limits the ban's effectiveness compared with containment or regulation.

  1. AIt is the only approach that cannot be applied to decentralised platforms
  2. BIt increases the market risk of banks' trading books
  3. CIt may be hard to enforce given crypto's cross-border and pseudonymous nature, pushing activity underground or offshore where it is less visible to authoritiesCorrect
  4. DIt automatically eliminates all capital flow management measures

Explanation

Bans face enforcement challenges because crypto assets are borderless and can be accessed via offshore platforms or peer-to-peer channels, reducing supervisors' visibility. The other options misstate the effects of a ban.

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