The Financial Stability Board (FSB) is calling for a global approach to the regulation of multifunction crypto firms, or MCIs. According to the FSB, these MCIs are critical to the cryptocurrency ecosystem but their business models have vulnerabilities and risks that may negatively impact global financial stability.
In a report published on Tuesday, the FSB highlighted the risks and vulnerabilities associated with MCIs. These firms combine a broad range of crypto-asset services, products, and functions, much like traditional finance platforms. However, unlike traditional finance platforms, these MCIs do not typically have the same restrictions in place to prevent conflicts of interest and promote market integrity, investor protection, and financial stability.
The FSB pointed out that vulnerabilities in crypto, such as leverage, liquidity mismatch, and technology, are not dissimilar to those in traditional finance. However, the combination of these functions within MCIs only works to exacerbate the potential vulnerabilities. Examples of combined functions at MCIs include proprietary trading, market making, and lending and borrowing, and the FSB cited the collapse of crypto-friendly banks this year as an indicator of how growing interconnectedness could pose risks.
The FSB also warned that allowing crypto firms to combine different activities as is with MCIs risks vulnerabilities that can have a negative impact on the global financial system. As a result, the organization recommends a global approach to regulatory enforcement across the crypto-asset markets.
This call for global regulation of MCIs follows the FSB’s February 2023 report on the risks of decentralized finance (DeFi) on financial stability. Additionally, the FSB released a global regulatory framework for crypto, which was endorsed by the G20 in September of this year.
The concerns and issues highlighted in the latest report are timely, especially in light of recent regulatory actions in the crypto space. For instance, crypto exchange Binance agreed to a historic $4.3 billion penalty as a settlement with US authorities, with its founder and then CEO stepping down.
Overall, the FSB’s call for global cooperation on the regulation of multifunction crypto firms reflects a growing recognition of the need for a coordinated approach to address the risks and vulnerabilities in the crypto-asset markets. It underscores the importance of international collaboration in ensuring the stability and integrity of the global financial system in the face of evolving challenges posed by the crypto ecosystem.