FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A supervisor argues that because banks currently have limited direct exposure to unbacked crypto assets, no regulatory framework is required. Which response best reflects the reasoning for a comprehensive framework?
Low direct bank exposure does not remove risk, because crypto can affect stability through indirect channels such as leverage, interconnections with intermediaries, household wealth effects and sudden confidence loss. A comprehensive framework is therefore still justified.
- AFinancial stability risks can arise through indirect channels such as wealth effects, leverage, interconnections with intermediaries and sudden loss of confidence, so limited direct bank exposure is not sufficient to dismiss the needCorrect
- BBanks' direct exposure is the only transmission channel, so the supervisor is correct
- CUnbacked crypto assets cannot be traded with leverage, so no risks arise
- DCrypto risks are fully eliminated by the underlying technology's transparency
Explanation
Risks can spread through leveraged trading platforms, household wealth losses, linkages to other financial entities and confidence shocks, not only direct bank holdings. Option B wrongly treats direct exposure as the sole channel, and leverage in crypto markets does exist.
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