A multinational financial regulator says global efforts are likely necessary for proper supervision of the crypto space.
In a new report, the Financial Stability Board (FSB) says that “multi-purpose crypto-asset intermediaries” (MCIs), or influential intermediaries involved in crypto projects, can increase vulnerabilities due to their interconnectedness with the asset class.
“The crypto asset market turmoil in May/June 2022 and the collapse of the FTX in November 2022 highlight that MCIs represent a critical part of the crypto asset markets and could exacerbate structural vulnerabilities in those markets, for example related to leverage and the mismatch in liquidity. Some MCIs are closely connected to a wide range of counterparties in the crypto ecosystem.”
According to the FSB, the failure of a major MCI could have significant consequences for the crypto ecosystem, given its central role and interconnected nature in the market.
“MCIs are also a common entry point for retail and institutional investors into the crypto ecosystem, and as such are potential channels for spillovers into the traditional financial system.”
The FSB recommends that governments “consider ways to improve cross-border cooperation and information sharing” to help regulators and authorities.
“MCIs are typically incorporated in crypto asset-friendly jurisdictions, but they operate in many other jurisdictions. Their complex organizational structures and lack of good governance and risk management amplify the vulnerabilities of MCIs, while their integration into jurisdictions where they are lightly (or even not) regulated poses the risk of regulatory arbitrage and a race to the bottom.
The global reach of MCIs can be too make it difficult for individual national authorities to establish and enforce robust requirements. Approaches are needed to address these concerns at a global level consolidated level, in addition to the individual MCI entity level (jurisdiction specific).
The FSB is also urging sensible ways of “cross-border cooperation” to avoid the possibility of leading MCIs moving to jurisdictions with more relaxed regulations to continue global operations.
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