Financial Stability Board Report Highlights Risks of Multi-Activity Crypto Firms

In a recent report published on Tuesday, the Financial Stability Board (FSB) downplayed the impact of collapsing crypto firms engaged in multiple activities on “the real economy.” The international standard-setter emphasised the need for further assessments due to existing “significant information gaps.”

The FSB, representing regulators, central banks, and treasury officials from G20 economies, underscored the potential threat posed by complex crypto firms, such as FTX, to the broader financial system. The report acknowledged that the turmoil in crypto markets during FTX’s collapse in the previous year revealed how “multifunction” crypto firms, involved in both trading and other activities, could amplify vulnerabilities. These vulnerabilities mirror those present in traditional finance, encompassing issues such as leverage, liquidity mismatches, technology, and operational vulnerabilities.

Having initiated an assessment in July on the financial stability implications of multifunction crypto-asset intermediaries (MCIs), the FSB defined MCIs as individual firms or groups combining various services, products, and functions typically centred around operating a trading platform. Notable entities like Coinbase or Binance could fall under this category.

The FSB cautioned that crypto firms engaging in diverse activities face higher susceptibility to failure, and mitigating the fallout hinges on the effectiveness of global crypto regulation implementation. The report identified “information gaps” that necessitate improved cross-border cooperation and information sharing.

Highlighting similarities between vulnerabilities in MCIs and traditional financial firms, the report noted that risks escalate when MCIs partake in proprietary trading, market-making on their platforms, and lending and borrowing. The FSB advocated for a thorough assessment of whether the disclosures and reporting requirements for MCIs are sufficient or if additional measures are warranted.

The report emphasised the potential inconsistency with the principle of ‘same activity, same risk, same regulation’ when functions in MCIs, typically separated in traditional finance, are combined. As the FSB calls for increased scrutiny and regulatory measures, the crypto industry awaits potential adjustments to address the identified risks and enhance financial stability.

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