Financial Stability Board Releases Report on Financial Stability Risks of Crypto-Assets | Shearman & Sterling LLP

The Financial Stability Board has published a report on the risks that crypto-assets pose to global financial stability. The FSB observes that the crypto-asset market is growing rapidly and could reach a point where it poses a threat to global financial stability. The rapid evolution of the market also increases the risk of regulatory loopholes and the possibility of arbitrage by market participants. The report covers the following areas:

  • Vulnerabilities regarding unbacked crypto-assets: these include financial sector exposures to the world of unbacked crypto-assets, as there is increased interconnectedness with the wider financial system, and the potential for sudden loss of confidence in the crypto-asset market which could, in a future period of market stress, cause crypto-assets to fall along with regulated risky assets and amplify a market correction.
  • Stablecoin vulnerabilities: These include the potential for large-scale buybacks on the stablecoin’s reserve assets to trigger untimely sales of those assets, causing market disruption, and the potential for future “global stablecoins” (i.e. i.e. stablecoins with potential reach across multiple jurisdictions) to enter the mainstream financial system, which brings a host of financial stability risks.
  • Decentralized crypto-asset finance and trading platforms: Regulatory threats arising from DeFi include its decentralized governance structure which makes it difficult for regulators to identify the body responsible for compliance and the anonymity of transactions which makes it difficult to traceability of transactions, thus increasing the risk of financial crime.
  • Data gaps: There is a lack of transparent and reliable data in crypto-asset markets, including in areas such as the share of households and assets versus each household that hold investments in crypto-assets. unsecured assets, the volume of crypto-asset fraud, and the number and value of transactions made in unsecured crypto-assets and stablecoins.

The report then summarizes the FSB’s key plans for 2022, which include exploring the potential regulatory implications of unsecured crypto-assets and continuing to monitor and share information on regulatory approaches to support the implementation of its recommendations for the regulation and oversight of global stablecoin agreements.

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