The Financial Stability Board (FSB), an international body that oversees the financial services industry, released a report on November 28 that highlights the need of additional regulations in the cryptocurrency sector. This report comes in the context of the collapse of FTX, a leading cryptocurrency exchange, which highlighted significant failures in multifunctional crypto asset intermediaries (MCIs).
MCIs are platforms that combine trading and other cryptocurrency-related activities. The FSB notes that although these intermediaries offer diverse services, combining functions can exacerbate vulnerabilities in the system. These vulnerabilities include participating in proprietary trading, market making on their own trading platforms, and lending crypto assets.
FSB identifies flaws in multifunctional crypto asset intermediaries
A critical point highlighted by the FSB is the lack of effective controls and transparency in these intermediaries. This, according to the Council, amplifies vulnerabilities, especially considering the centrality of MCIs in the cryptoasset ecosystem and their concentration and market power.
The FSB suggests that regulators need to assess whether existing recommendations, formulated by the FSB itself and the International Organization of Securities Commissions (IOSCO), are sufficient to mitigate risks related to cryptocurrencies in the broader financial landscape. In July, the FSB finalized its recommendations for a global cryptocurrency framework. In September, it presented policy recommendations together with the International Monetary Fund (IMF), at the request of the G20.
G20 adopts FSB and IMF recommendations for cryptocurrency regulation
These recommendations subsequently gained adoption by the G20 as a regulatory roadmap, marking a significant step in trying to integrate the cryptoasset market into a more regulated and secure global financial system.
The FTX case, therefore, not only draws attention to the urgent need for regulation in the cryptocurrency sector. It also serves as a warning of the risks associated with a lack of adequate oversight in a rapidly evolving market.