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

A supervisor in Country A has banned banks from holding unbacked crypto assets. A risk officer argues this is sufficient to protect financial stability. Which response best reflects the reasoning of an integrated regulatory framework for the crypto ecosystem?

A bank ban alone is insufficient because crypto risks can flow through non-bank intermediaries, investors, and cross-border platforms. An ecosystem-wide framework covers all of these actors and the links between them, so activity does not simply migrate to unregulated channels while risks still build up.

  1. AThe ban is sufficient because banks are the only channel through which crypto can affect stability
  2. BThe ban is insufficient alone because exposures can arise through non-bank intermediaries, retail and institutional investors, and cross-border platforms, so the framework must cover the whole ecosystemCorrect
  3. CThe ban is unnecessary because crypto assets are already covered by deposit insurance
  4. DThe ban should be replaced by lower capital charges so banks can hold crypto freely

Explanation

An ecosystem-wide view recognises that risks pass through many actors besides banks, including exchanges, wallets, and other intermediaries and investors. A bank-only restriction leaves these channels unaddressed and invites activity to migrate elsewhere. Crypto assets are not covered by deposit insurance.

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