Financial Stability Board Says ‘Cross-Border Cooperation’ May Be Needed To Regulate Crypto Asset Intermediaries

A multinational financial regulator says global efforts are likely necessary for proper oversight of the crypto space.

In a new report, the Financial Stability Board (FSB) says that “multifunction crypto-asset intermediaries” (MCIs), or influential intermediaries involved in crypto projects, can magnify vulnerabilities due to their interconnectedness with the asset class.

“The May/June 2022 crypto-asset market turmoil and the collapse of FTX in November 2022 highlight that MCIs represent a critical part of crypto-asset markets and can exacerbate structural vulnerabilities in those markets, e.g. relating to leverage and liquidity mismatch. Some MCIs are deeply interconnected with a broad range of counterparties across the crypto-asset ecosystem.”

According to the FSB, the failure of a key MCI could have significant implications for the crypto-asset ecosystem, given its central role and interconnected nature in the market.

“MCIs also are a common entry point for retail and institutional investors into the crypto-asset ecosystem, and as such are potential channels for spillovers into the traditional financial system.”

The FSB recommends governments “consider ways to enhance cross-border cooperation and information sharing” to assist regulators and authorities.

“MCIs are typically incorporated in crypto-asset-friendly jurisdictions, but they conduct activities in many other jurisdictions. Their complex organizational structures and lack of proper governance and risk management amplifies MCI vulnerabilities, while their incorporation in jurisdictions where they are lightly (or even not) regulated brings the risk of regulatory arbitrage and a race to the bottom.

The global reach of MCIs can also make it difficult for individual national authorities to adopt and enforce robust requirements. Approaches are needed to address these concerns at the global and consolidated level in addition to at the individual MCI entity (jurisdiction-specific) level.”

The FSB also urges sensible means of “cross-border cooperation” to avoid the likelihood that leading MCIs relocate to jurisdictions with more relaxed regulations to continue global operations.

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