Financial Stability Board Discuss Crypto Risks

On 16 February 2022, the Financial Stability Board (FSB) published an updated assessment of risks to financial stability from crypto assets, focusing on unbacked crypto-assets (such as Bitcoin), stablecoins, and decentralized finance (DeFi). 

The FSB report notes the 3.5 x growth of crypto-asset market capitalization in 2021, but acknowledges that currently crypto-assets remain a small portion of overall global financial system assets.

Nonetheless, the FSB states: 

If the current trajectory of growth in scale and interconnectedness of crypto-assets to these institutions were to continue, this could have implications for global financial stability.

Echoing very similar statements of the IMF that we reported on here, the FSB concludes that the use of crypto-assets could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.

Some of the risks identified by the FSB include:

• institutional investors becoming over exposed to crypto assets that is not captured by current regulatory treatment, and their use of leverage or derivatives; 
• loss of confidence in stablecoins triggering sales of their reserve assets, potentially affecting the functioning of short-term funding markets;
• a rapid growth of DeFi without clearly identifiable intermediaries that are subject to regulatory and supervisory requirements; and
• regulatory arbitrage and data gaps increasing the potential for systemic risk. 

The FSB proposes that the possibility for regulatory arbitrage should be minimized through further international cooperation and information sharing.

See Also

The SEC Adopts Controversial New Rule: Potentially Problematic for DeFi

On ‘global stablecoins’ (GSCs) (i.e. stablecoins that could be widely used across multiple jurisdictions), the FSB references its 2020 report entitled ‘Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements’  and notes that the FSB is coordinating with the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (CPMI-IOSCO) to determine regulatory approaches for GSCs, including those intended for use in mainstream payments.  

The report notes that during 2022 the FSB will explore financial stability threats posed by unbacked crypto-assets; watch this space! 

While it is laudable that traditional finance watchdogs take such an interest in emerging areas like crypto, it should be remembered that so far no crypto companies have become too big to fail, and it is hard to objectively assess claims that crypto poses systemic risks.  One wonders whether the primary goal of the FSB and others is to assert their relevance over the crypto beast that threatens to outpace their regulatory frameworks.