The Financial Stability Board ("FSB") updated its assessment of the risks to financial stability created by crypto-assets. In the new report, the FSB considered three segments of the crypto-asset markets: (i) unbacked crypto-assets such as Bitcoin, (ii) stablecoins and (iii) decentralized finance and other crypto-asset trading platforms.
The FSB reviewed the growth of the crypto-asset market over the past few years and highlighted the public policy concerns that arise from the lack of understanding of crypto-assets among investors and consumers. The FSB notes the expanding links between crypto-assets and traditional financial markets and identified some of the structural vulnerabilities with respect to crypto markets and stablecoins. These vulnerabilities include (i) liquidity mismatches, (ii) credit and operational risks, (iii) susceptibility of stablecoins to sudden and disruptive runs on their reserves, (iv) the increased use of leverage, (v) the concentration of risk on a few large crypto-asset trading platforms and (vi) the opacity and lack of regulatory oversight of the crypto sector.
The FSB identified a number of areas that warrant continued supervision and consideration for purposes of maintaining financial stability. These include:
- the increasing involvement of banks in the "crypto-asset eco-system, especially where activities give rise to balance sheet exposure to crypto-assets, not captured by (or not in compliance with) appropriate regulatory treatment";
- loss of confidence in stablecoins and losses in crypto-assets overall, particularly where such assets are tied to leverage, liquidity mismatch or interconnections with traditional financial markets;
- regulatory arbitrage created by jurisdictional differences in the regulation of crypto-asset markets; and
- the increasing adoption of crypto-assets for payments.
The FSB said it plans to continue monitoring developments and risks in the crypto-asset markets, and exploring the regulatory and supervisory implications of unbacked crypto-assets.
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