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

A supervisor reviews a global bank that has no direct crypto holdings but provides credit lines to several crypto-lending firms and custody services to a large exchange. Applying a perimeter-based framework for the crypto ecosystem, which assessment is most appropriate?

Even without direct crypto holdings, the bank faces counterparty, operational and reputational channels through its credit lines and custody services. Supervisors should capture these indirect links in monitoring and prudential treatment, since stress in the crypto sector can transmit to the bank.

  1. AIndirect exposures through credit and service relationships can transmit crypto stress to the bank, so they should be captured within supervisory monitoring and prudential treatmentCorrect
  2. BNo risk exists because the bank holds no crypto on its balance sheet
  3. COnly the exchange's regulator needs to assess the relationship
  4. DThe credit lines are risk-free because crypto firms hold fully backed reserves

Explanation

Contagion can flow through counterparty credit, operational and reputational channels even without direct holdings. Supervisors should therefore look at indirect links like lending and custody. Unbacked assets provide no guaranteed backing, and one regulator alone cannot see the bank's full exposure.

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