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

A risk officer compares two policy approaches to unbacked crypto assets: (A) a comprehensive ban on regulated financial institutions holding or dealing in them, and (B) permitting activity under licensing, disclosure and prudential rules. Which statement most accurately describes a trade-off between them?

A ban protects regulated institutions from direct exposure but may push activity to unregulated venues and reduce visibility. Licensing and disclosure rules improve oversight and investor protection but can be perceived as legitimizing the assets, so each approach carries a distinct trade-off.

  1. AA limits direct exposure of the regulated sector but may push activity to unregulated venues, while B improves oversight and transparency but may be seen as legitimizing the assetsCorrect
  2. BA removes all risk from the economy, while B has no impact on investor protection
  3. CB is always inferior because licensing cannot address market integrity
  4. DA and B are identical in effect on supervisory visibility

Explanation

Bans shield regulated institutions but can drive activity underground, reducing visibility. Licensing brings activity into the perimeter and supports consumer protection, but risks implying official endorsement. No approach eliminates risk entirely.

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