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

A supervisor assessing the macro-financial risks of unbacked crypto assets in an emerging economy is most concerned that widespread use as a substitute for domestic currency could produce which outcome?

Widespread use of crypto in place of domestic currency weakens monetary policy effectiveness and complicates capital flow management, a process called crypto-isation. The central bank loses influence over money conditions and the government loses seigniorage, which can heighten macro-financial instability.

  1. AStronger monetary transmission because interest rates apply to crypto balances
  2. BWeaker monetary policy effectiveness and capital flow management, through crypto-isationCorrect
  3. CLower exchange rate volatility due to reduced demand for foreign currency
  4. DHigher seigniorage revenue for the government

Explanation

If residents hold crypto instead of local currency, the central bank's control over money conditions and its ability to apply capital flow measures weaken, a risk the IMF calls crypto-isation. Crypto is not subject to policy rates, and seigniorage would fall rather than rise.

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