Crypto could pose systemic risk, FSB warns

Citing concerns about the prospect of fast-growing systemic risks in the fledgling cryptoasset markets, the Financial Stability Board (FSB) is calling on policymakers to think ahead and consider possible regulatory measures.

In a new report, the FSB said that, while crypto markets currently remain small in the context of the global financial system, the threat of rapidly escalating financial stability risks in the sector “calls for timely and pre-emptive evaluation of possible policy responses.”

The FSB warned that the crypto sector’s growth, its increased connections to the traditional financial system, and its inherent vulnerabilities, mean that it could evolve to the point where it, “[represents] a threat to global financial stability.”

“The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage,” the report said.

To address these risks, the report called for enhanced monitoring, along with further cooperation and information sharing among regulators to minimize regulatory arbitrage risks.

The report suggested that systemic risks may arise for a variety of reasons, including the sector’s lack of transparency and regulatory oversight, concentration risk among crypto trading platforms, increasing use of leverage in the sector, and the possibility that runs on the reserves of stablecoins could spill over to the traditional short-term funding markets.

There are also wider public policy concerns involved with the crypto sector, the FSB noted, including low levels of investor and consumer understanding, heightened money laundering risks, and the threat of cyber-crime and ransomware.

Given its concerns, in the year ahead, the FSB said that it plans to “explore potential regulatory and supervisory implications of unbacked crypto-assets”, including the gaps and oversight challenges that may exist due to the “cross-border and cross-sectoral nature of crypto-assets.”

The FSB said that it will also work to ensure that its recommendations for the regulation of “global stablecoin” arrangements are adopted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.