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  • J Huang and M Bacina

FSB says "crypto contagion" a limited threat to real economy

The Financial Stability Board (FSB), a multi-international financial standard-setter, said in its recent report that crypto firms that engage in multiple activities only pose a limited threat to the "real" economy.

The report, titled The Financial Stability Implications of Multifunction Crypto-asset Intermediaries, was published by the FSB on 28 November 2023. As its title suggests, the report focused on the financial stability risks associated with multifunction crypto-asset intermediaries (MCIs).

FSB defined MCIs as:

individual firms, or groups of affiliated firms, that combine a broad range of crypto-asset services, products, and functions typically centred around the operation of a trading platform.

Many MCIs also have proprietary trading and investment functions, while some are also involved in issuing, promoting, and distributing crypto-assets including stablecoins. FSB raised several examples of MCIs: Coinbase, Binance and FTX (pre-collapse) - all got into various troubles with regulators, and the last being one of the reasons that prompted FSB to conduct this report.

FSB said MCIs vulnerabilities are not very different from those of traditional finance - common vulnerabilities include leverage, liquidity mismatch, technology and operational vulnerabilities, and interconnections.

However, some combinations of functions - which are typically separated in traditional finance - within a single MCI could exacerbate these vulnerabilities. Vulnerabilities are further also amplified by:

  • a lack of effective controls and operational transparency,

  • poor or no disclosures, and

  • conflicts of interest.

Additionally, there are vulnerabilities stemming from the concentration of MCIs and their market power.

FSB concluded that,

The collapse of a major MCI could have significant contagion effects for the crypto-asset ecosystem, but limited effects on the financial sector and the real economy.

In addition, FSB said further assessments are required because "significant information gaps remain."

As an international standard-settler that monitors financial systems and proposes rules to help prevent financial crises, FSB has been consistently focusing on the crypto sector. This report follows another FSB report in July advising on implementing a global regulatory framework for crypto-asset activities.

FSB's reports will provide valuable information and statistics that could inform governments around the world to come up with their regulatory framework for the crypto industry.

Written by Jake Huang and Michael Bacina


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