FSB’s Concerns About Crypto Asset Intermediaries | 13 Dec 2023

Source: TH

Why in News?

Recently, the Financial Stability Board (FSB)’s latest report on crypto-asset intermediaries sought measures to enhance cross-border cooperation and information sharing among local authorities. This is to effectively regulate and address gaps in Multi-function Crypto-asset Intermediaries (MCIs) operating globally.

What are Crypto Assets?

• Crypto assets are a digital representation of value that can transfer, store, or trade electronically. This also includes non-fungible tokens (NFTs).
  • NFTs are blockchain-based tokens that each represent a unique asset like a piece of art, digital content, or media. An NFT can be thought of as an irrevocable digital certificate of ownership and authenticity for a given asset, whether digital or physical.
• Crypto assets are a subset of digital assets that use cryptography to protect digital data and distributed ledger technology to record transactions.

What are the Multi-function Crypto-asset Intermediaries (MCIs)?

• MCIs is an individual firm, or groups of affiliated firms that offer a range of crypto-based services, products and functions which primarily revolve around operating the trading platform.
  • Examples include Binance, Bitfinex and Coinbase.
• The primary source of revenue for these platforms are the transaction fees generated from trading-related activities.
• These MCIs may also derive revenue from operating a blockchain infrastructure for which they may collect transaction validation fees.

What are the Concerns Related to MCIs as per FSB’s Report?

• Transparency: The report observes that most MCIs are generally not transparent about their corporate structure. If they disclose information it is typically for a small part of their business, specific to a jurisdiction.
  • MCIs failed to provide a clear account of transactions activities or audit practices.
• Anti-Competitive Behavior: Having a large concentration of services in one place may lead to anti-competitive behavior, making the system more vulnerable.
  • This concentration could make it harder for new competitors to enter the market and increase the costs for users who want to switch to a different service provider.
• Crypto-Friendly Banks: The shutting down of banks friendly to crypto assets highlights the widespread risk of having a significant concentration of deposits tied to businesses relying on crypto assets.
  • Market stress in crypto-asset markets led to substantial losses for investors, eroding confidence in these markets.
• Cryptocurrencies and Fiat currencies: MCIs rely on banks and payment providers for transaction services, including converting between cryptocurrencies and (on-ramp and off-ramp services).
  • If the trading platform stops operating or if the bank fails to offer real-time operations, there is a risk of counterparty issues.
  • Additionally, providing loans and credit lines to MCIs by banks involves credit risk, especially when using crypto-based collaterals that may decline in value in the future.

Way Forward

• International Cooperation and Information Sharing:
  • Promote enhanced cross-border cooperation and information sharing among local authorities to effectively regulate and address gaps in the operations of MCIs.
  • Establish international standards for transparency and reporting to ensure a comprehensive understanding of the operations of MCIs across jurisdictions.
• Regulatory Measures:
  • Develop and implement clear regulatory frameworks specifically tailored to address the unique challenges posed by MCIs, fostering market integrity, investor protection, and financial stability.
• Corporate Transparency:
  • Mandate MCIs to enhance corporate transparency by providing detailed information about their corporate structure, business lines, and operations.
  • Implement measures to penalize non-compliance with transparency standards, ensuring that MCIs disclose relevant information for comprehensive regulatory oversight.