FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A risk officer at a bank studies why centralised crypto exchanges that combine trading, custody, lending and market-making raise concerns. Which market failure best describes the main problem with this bundling of functions?
The key problem is conflicts of interest and weak transparency. A platform that is simultaneously broker, custodian, lender and proprietary trader can misuse or commingle client assets and trade against customers. Traditional markets separate these roles to limit such risks, which is why regulators focus on them.
- AConflicts of interest and opaque handling of customer assets, since the same entity acts as broker, custodian and proprietary traderCorrect
- BExcess regulatory capital that reduces credit supply
- CMandatory central clearing that concentrates counterparty risk in a CCP
- DOver-reliance on deposit insurance that encourages risk-taking
Explanation
When one firm performs several roles, conflicts of interest arise, including trading against clients, commingling client assets and weak disclosure. Traditional finance separates these functions. The other options describe features not typical of unregulated crypto exchanges.
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