FSB Report on Crypto Industry Post-FTX Scandal
The Financial Stability Board (FSB), a global watchdog for the financial services industry, released a report on November 28, highlighting the need for additional regulations in the cryptocurrency sector. This comes in the wake of the FTX scandal, a significant event that has shaken the industry.
Identifying Flaws in Multi-Function Crypto-Asset Intermediaries
According to the FSB, the market turmoil following the collapse of the FTX cryptocurrency exchange revealed critical flaws in multifunction crypto-asset intermediaries (MCIs). These platforms, which combine various trading and related activities, exhibit vulnerabilities similar to traditional finance institutions, including issues with leverage, liquidity mismatch, and operational weaknesses.
The Unique Vulnerabilities of MCIs
The FSB noted that while MCIs share some vulnerabilities with traditional financial institutions, certain combinations of functions within these platforms could exacerbate these issues. This includes their involvement in proprietary trading, market making on their own trading venues, and the lending and borrowing of crypto-assets.
Lack of Effective Controls and Transparency
The report emphasized that these vulnerabilities are intensified by a lack of “effective controls” and transparency within the cryptocurrency industry. This is further compounded by the central role MCIs play in the crypto-asset ecosystem, along with their market concentration and power.
International Regulatory Recommendations
The FSB suggests that regulators reassess whether existing recommendations, previously published by the FSB and the International Organization of Securities Commissions, are sufficient to mitigate crypto-related risks within the broader financial landscape.
Addressing Cross-Border Cooperation and Information Gaps
The report calls for enhanced cross-border cooperation and information sharing, addressing information gaps that have been identified. This aligns with the FSB’s ongoing efforts to establish a global crypto regulatory framework.
FSB’s Global Crypto Framework Initiatives
In July, the FSB finalized its recommendations for a global crypto framework, followed by joint policy recommendations with the International Monetary Fund (IMF) in September. These recommendations were in response to a request from the G20, addressing the need for a cohesive approach to cryptocurrency regulation globally.