The Financial Stability Board (FSB) Raises Concerns over Cryptos

Governments and regulators across key crypto jurisdictions have ramped up crypto scrutiny in recent months. A number of central banks and global agencies have also raised concerns over crypto assets and financial stability.

The Bank of England Domino Effect

In late 2021, the Bank of England (BoE) released its Financial Stability Review for December 2022, citing 4 key sections. One of the sections focused solely on crypto assets. The other three included COVID-19 and the Economy, Bank Resilience, and Mortgage Measures.

December’s report stated that crypto assets posed limited direct risks to UK financial stability. The Bank did point out, however, that such assets will present a number of financial stability risks if growth continues at their rapid pace and as they become more “interconnected” with the wider financial system.

Since the Bank of England’s Financial Stability Review calls for a global crypto regulatory framework, regulatory activity has increased markedly.

Other regulators including the RBI and even the Biden Administration have come forward, paving the way for a global framework.

Agencies have also shared their views, with the IMF having echoed the BoE’s concerns back in January.

The FSB Joins the BoE and the IMF in Raising the Alarm over Crypto Assets

Today, the Financial Stability Board released an assessment of risks that crypto-assets pose to financial stability. The assessment focused on 3 segments of the crypto markets, these being:

• Unbacked crypto assets, such as Bitcoin (BTC).
• Stablecoins, such as USD Coin (USDC).
• DeFi and other platforms on which crypto-assets trade.

Salient points from today’s assessment included:

• Risks to financial stability could escalate rapidly.
• As the interconnectedness between crypto-assets and financial institutions and core financial markets continues to grow, this could impact global financial stability.
• DeFi has become a fast-growing sector, providing financial services with unbacked cryptos and stablecoins.
• A lack of regulatory oversight or non-compliance presents the potential for concentration risks and underlines the lack of transparency on their activities.
• Stablecoin growth has also continued and are currently used as a bridge between fiat and crypto assets.
• If a major stablecoin failed, liquidity constraints could disrupt trading and create market stress that could spill over to short-term funding markets in the event that stablecoin reserve holdings were liquidated in a disorderly manner.
• Liquidity mismatch, as well as credit and operational risks, expose stablecoins to runs on their reserves.
• Low levels of investor and consumer understanding of cryptos, money laundering, cyber-crime, and ransomware also raise red flags.
• Governments and regulators should evaluate pre-emptive measures to regulate crypto-assets.

For regulators across the world, the FSB report is aligned with other regulators and agencies on the need for increased scrutiny and oversight. The timing of the report is apt, with the markets waiting on the White House Executive Action on cryptos.

For the U.S government, stablecoins have been a hot topic, with lawmakers and the U.S Treasury exploring ways to minimize the risks that stablecoins pose to financial stability.