FTX failure reveals flaws in multifunction crypto-asset intermediaries

The Financial Stability Board (FSB) — the global body that monitors the financial services industry — released a report on Nov. 28 claiming the crypto industry might need additional regulations to prevent another catastrophe on the scale of the FTX scandal.

According to the report, the FSB said the market turmoil that ensued from the collapse of cryptocurrency exchange FTX brought to light the flaws in multifunction crypto-asset intermediaries (MCIs), which are platforms that combine trading and related activities.

“MCI vulnerabilities are not very different from those of traditional finance, including leverage, liquidity mismatch, technology and operational vulnerabilities, and interconnections.”

However, in the case of MCIs, it said particular combinations of functions could “exacerbate these vulnerabilities,” such as MCI engagement in “proprietary trading, market making on their own trading venues and the lending and borrowing of crypto-assets.”

The FSB said these vulnerabilities are amplified even more by what it called the lack of “effective controls” and transparency.

“There are also additional vulnerabilities stemming from the centrality of MCIs in the crypto-asset ecosystem and their concentration and market power,” it said.

The international watchdog suggested that regulators assess whether recommendations previously published by the FSB and the International Organization of Securities Commissions will prevent crypto-related risks from being exacerbated in the broader financial landscape.

“Further work may be needed to enhance cross-border cooperation and information sharing and to address information gaps identified in the report.”

In July, the FSB finalized its recommendations for a global crypto framework and released joint policy recommendations for crypto assets alongside the International Monetary Fund (IMF) at the request of the 20 leading economies of the world, known as the G20, in September.

A few weeks later, the G20 adopted the IMF-FSB recommendations as a regulatory roadmap.

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