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

A supervisor wants to evaluate whether a containment strategy is working. Which indicator would best show that crypto-related risks are being successfully ring-fenced from the traditional financial system?

Stable, limited direct and indirect exposures of regulated institutions to crypto, together with weak co-movement between crypto price shocks and bank funding conditions, indicate successful containment. Rising bank exposures or deposit links show growing transmission channels instead.

  1. AA rising share of bank balance sheets held in crypto-linked exposures
  2. BStable and limited direct and indirect exposures of regulated institutions to crypto, with little co-movement between crypto price shocks and bank funding conditionsCorrect
  3. CA growing volume of crypto trading on offshore platforms by retail investors
  4. DAn increase in the number of crypto exchanges holding bank deposits

Explanation

Successful containment shows up as limited exposures and weak transmission of crypto shocks to regulated institutions. Growing bank exposures or deposits at banks indicate stronger linkages, and offshore retail growth indicates risk outside the perimeter, not ring-fencing.

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