• The Financial Stability Board (FSB) says multifunction crypto-asset intermediaries (MCIs) are critical to the cryptocurrency ecosystem.
    • However, their business models have vulnerabilities and risks that may negatively impact global financial stability.
    • The FSB recommends a global approach and cooperation on regulation of these MCIs.

    The Financial Stability Board (FSB), an international organisation that monitors and makes recommendations about the global financial system, is seeking for greater cooperation among national regulatory bodies when it comes to the regulation of crypto.

    In particular, the FSB has called for cross-border collaboration between different regulators across the globe in the supervision of multifunction crypto-asset intermediaries (MCIs). While critical to the crypto ecosystem, there are risks and vulnerabilities linked to crypto behemoths that combine services and products.

    These risks can be impactful on global financial stability, the FSB said.

    MCI vulnerabilities

    In its report published on Tuesday, the FSB describes MCIs as “individual firms, or groups of affiliated firms – such as FTX (prior to its failure) – that combine a broad range of crypto-asset services, products, and functions.”

    Per the Swiss-based organisation, these services and products typically marks a trading platform’s operations and bear similarities to those handled in traditional finance.

    However, unlike in crypto, traditional finance platforms do not usually offer all these under the same entity. Often, restrictions are applied “to prevent conflicts of interest and promote market integrity, investor protection, and financial stability.”

    While it says vulnerabilities in crypto, including leverage, liquidity mismatch, and technology, are not dissimilar to those in traditional finance, a combination of functions only works to exacerbate the potential vulnerabilities.

    Examples of combined functions at MCIs include proprietary trading, market making and lending and borrowing. FSB pointed to the collapse of crypto-friendly banks this year as an indicator of how growing interconnectedness could pose risks.

    Allowing crypto firms to combine different activities as is with MCIs risks vulnerabilities that can have negative impact on the global financial system, FSB warned in its report. A global approach to regulatory enforcement across the crypto-asset markets is therefore needed, the agency recommended.

    Concerns and issues in the latest report are a follow up on FSB’s February 2023 report on risks of decentralised finance (DeFi) on financial stability. The FSB also released a global regulatory framework for crypto, which the G20 endorsed in September this year.

    As highlighted last week, crypto exchange Binance agreed a historic $4.3 billion penalty as settlement with US authorities, with its founder and then CEO stepping down.



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