FSB points out shortcomings in multi-functional crypto-asset intermediaries highlighted by FTX collapse

The Financial Stability Board has released a report highlighting the need for additional regulations in the crypto industry, particularly in the wake of the FTX collapse, to mitigate risks similar to those in traditional finance.

The Financial Stability Board (FSB), a pivotal global financial watchdog, has recently spotlighted the need for heightened regulatory oversight in the cryptocurrency sector. This call for action, highlighted in their report released on Nov. 28, gains relevance in the aftermath of the FTX fiasco, a debacle that rattled the core of the crypto world.

The FSB’s analysis pinpoints a vulnerability within multifunction crypto-asset intermediaries (MCIs). These platforms, which blend trading and related activities, mirror traditional financial vulnerabilities such as leverage risks, liquidity mismatches and operational failures.

Multifunction crypto-asset intermediaries (MCIs) are a critical component of the #cryptoasset ecosystem as their business models have expanded and continue to evolve. Our report looks at MCI vulnerabilities and risks they may pose to #FinancialStability
👉 https://t.co/iA9O6X2lBs pic.twitter.com/s8ESzJmMEn

— The FSB (@FinStbBoard) November 28, 2023

However, the FSB shows that the unique combination of functions in MCIs, like proprietary trading and crypto-asset lending, intensifies these risks. The report stresses the enhanced perils due to inadequate controls and lack of transparency in these entities.

Additionally, the FSB raises concerns about the central role of MCIs in the crypto ecosystem, highlighting their market concentration and power. This centrality, coupled with the aforementioned vulnerabilities, poses a broader risk to the financial landscape.

In response, the FSB urges regulators to consider whether existing recommendations – crafted by both the FSB and the International Organization of Securities Commissions – are sufficient to mitigate these crypto-related risks. The FSB suggests that further efforts may be necessary to improve cross-border collaboration and information sharing, addressing identified gaps.

This call to action follows the FSB’s finalization of global crypto framework recommendations in July and the joint policy recommendations with the International Monetary Fund in September, at the G20’s request.