Securities Finance Technology News | FSB advises quick action to contain crypto-asset risks

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The rapid growth of crypto-asset markets could pose a threat to global financial stability, according to a Financial Stability Board (FSB) report released today.

The report, “Financial Stability Risk Assessment of Crypto-Assets,” warns that the pace and scale of the expansion of crypto-assets, their growing interconnectedness with the “mainstream” financial system, and associated structural vulnerabilities, could lead to a rapid acceleration of risks to financial stability. .

This requires a rapid and preemptive assessment of available policy responses and measures to address potential regulatory gaps, arbitrage opportunities and fragmentation, the Basel-based organization says.

In the report, the FSB focuses on vulnerabilities associated with three parts of the crypto-asset market, including unbacked crypto-assets (e.g. Bitcoin), stablecoins, and decentralized crypto-funding and trading platforms. assets.

Given the close relationship between these three segments, they should be considered “holistically” when assessing risks to financial stability.

The FSB notes that the market capitalization of crypto-assets has increased by 350% in 2021 to reach US$2.6 trillion, although this is only a small percentage of the overall assets of the global financial system.

However, as the ties between crypto-asset markets and the regulated financial system tighten, this could increase the broader danger to global financial stability. Threats can also come from liquidity mismatches, credit and operational risks that subject stablecoins to sudden runs on their reserves.

The FSB also reflects in the report on the increased use of leverage by some traders, the risks of concentration on digital asset trading platforms, as well as the opacity and lack of regulatory oversight in some parts of the world. Marlet.

These concerns may be exacerbated in some cases by investors’ poor understanding of the potential risks associated with investing in crypto-assets, as well as the threats presented by money laundering, cybercrime and ransomware.

Currently, the FSB notes, the stablecoin is primarily used as a bridge between traditional fiat currencies and crypto-assets. If a stablecoin were to fail, however, liquidity within the broader crypto-asset ecosystem (including DeFi) could be limited, leading to trading disruption and potential stress in those markets.

This stress could also spill over to short-term funding markets if stablecoin reserves are liquidated in a disorderly fashion, the FSB concludes.

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