Global Regulators Evaluate Crypto Safeguards Amid Concerns of Financial Instability

In response to the increasing complexity and potential risks associated with cryptocurrency firms, global regulators are set to assess whether additional safeguards are necessary to prevent blow-ups, such as the one witnessed during the collapse of FTX, from destabilizing the broader financial system.

According to Reuters, the Financial Stability Board (FSB), a consortium comprising regulators, central banks, and treasury officials from the G20 economies, issued a statement on Tuesday, emphasizing the need for further measures to address vulnerabilities in the rapidly evolving crypto landscape.

The FSB highlighted the turmoil in crypto markets last year when FTX collapsed, underscoring the challenges posed by “multifunction” crypto firms that engage in a combination of trading and other activities. The report pointed out that these firms share vulnerabilities with traditional finance, including issues related to leverage, liquidity mismatches, technology, and operational vulnerabilities.

The FSB’s report stated, “These vulnerabilities are further amplified by a lack of effective controls and operational transparency, poor or no disclosures, and conflicts of interest.” The acknowledgment of these challenges raises concerns about the potential impact on financial stability and the broader economy.

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Despite these vulnerabilities, the FSB indicated that the current threat to wider financial stability and the economy is limited. However, the report highlighted the need for continued vigilance and proactive measures to mitigate risks associated with crypto activities.

Earlier this year, the FSB and the International Organization of Securities Commissions (IOSCO), a global body of securities watchdogs, released high-level recommendations for supervising crypto activities. While these measures represent a step in the right direction, the FSB report suggests that regulators should evaluate whether they are sufficient to prevent crypto-related risks from amplifying across the financial system.

The report urged regulators to focus on enhancing cross-border cooperation and information sharing to address potential information gaps. It emphasized that further work may be required to ensure the effectiveness of existing measures and to adapt to the evolving nature of the crypto landscape.

As the crypto market continues to evolve and gain prominence in the financial sector, global regulators face the ongoing challenge of striking a balance between fostering innovation and ensuring the stability of the wider financial system.

Source: Reuters