The Financial Stability Board (FSB), a global regulatory body overseeing the financial services sector, issued a report on November 28 suggesting that the cryptocurrency industry might require additional regulations to avert another crisis akin to the FTX scandal.
According to the report, the recent market upheaval stemming from the collapse of the FTX cryptocurrency exchange exposed inherent flaws in multi-purpose crypto-asset intermediaries (MCIs). These intermediaries, which combine various trading and related activities, demonstrated vulnerabilities analogous to those found in traditional finance sectors. These include issues related to leverage, liquidity mismatches, technical weaknesses, operational vulnerabilities, and interconnectedness.
The FSB highlighted that specific combinations of functions within MCIs, such as involvement in proprietary trading, operating as market makers on their own trading platforms, and engaging in lending and borrowing of cryptoassets, could worsen these vulnerabilities. These vulnerabilities were further magnified by the absence of effective controls and transparency within the MCIs. Additionally, the report emphasized that the central position and concentration of market power held by MCIs within the crypto-asset ecosystem also contribute to potential vulnerabilities.
International regulators recommended that oversight bodies assess whether the previously issued recommendations by the FSB and the International Organization of Securities Commissions (IOSCO) could effectively mitigate cryptocurrency-related risks that might affect the broader financial sector. The report suggested that further efforts might be necessary to bolster cross-border cooperation, improve information sharing, and address the identified information gaps related to cryptocurrency activities.
In preceding months, the FSB had finalized recommendations for a comprehensive global framework regarding cryptocurrencies and, in collaboration with the International Monetary Fund (IMF), released joint policy suggestions for crypto-assets at the request of the G20—the group comprising the world's 20 major economies. These efforts were part of a broader initiative to establish guidelines and policies for managing and regulating the evolving landscape of crypto-assets and their impacts on global financial stability.
