The Financial Stability Board (FSB) has warned digital assets have reached a point where they are a threat to global financial stability because of their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.
The body, based in Switzerland and composed of international financial regulators and governments, on Wednesday released an updated report on the risks to financial stability from crypto assets.
The new take is an evolution from the FSB’s previous report published in 2018, which concluded that crypto assets did not “pose a material risk to global financial stability”.
The report examines weaknesses related to unbacked crypto assets such as bitcoin, stablecoins, decentralised finance (DeFi) and crypto-asset trading platforms and finds a complex and constantly evolving interrelationship among these segments.
Vulnerabilities associated with crypto-asset markets include growing links with the regulated financial systems.
The report highlights liquidity mismatches that pose credit and operational risks, for instance by making stablecoins susceptible to sudden and disruptive runs on their reserves, with the potential to spill over to short-term funding markets.
The increased use of leverage in investment strategies, the concentration risk of trading platforms and the opacity and lack of regulatory oversight of the sector are other structural weaknesses mentioned.
The report also notes wider public policy concerns related to crypto assets, such as low levels of investor and consumer understanding of crypto assets, money laundering, cyber-crime and ransomware.
The FSB concludes that financial stability risks could escalate rapidly and calls for timely and pre-emptive evaluation of possible policy responses.
Crypto-asset market capitalisation grew by 3.5 times in 2021 to US$2.6 trillion, but crypto-assets remain a small portion of overall global financial system assets.
Direct connections between crypto assets and systemically important financial institutions and core financial markets, while growing rapidly, also remain limited.
“Nevertheless, the rapid evolution and international nature of crypto-asset markets raise the potential for regulatory gaps, fragmentation or arbitrage,” the FSB warned.
The organisation said it will explore potential regulatory and supervisory implications of unbacked crypto assets and share information on regulatory and supervisory approaches to ensure the implementation of its high-level recommendations for the regulation, supervision and oversight of so-called ‘global stablecoin’ arrangements.
These recommendations are part of the FSB’s roadmap to enhance cross-border payments.
Highest-ever SEC penalty for DeFi lending
Earlier this week crypto lending platform BlockFi agreed to pay $100 million in a settlement with the US Securities and Exchange Commission, after the SEC charged the company with failing to register the offer and sale of its crypto lending product under the Investment Company Act.
The fine is the largest recorded penalty for a crypto firm.
BlockFi will pay $50 million of the penalty directly to the SEC and another $50 million to 32 US states to settle similar charges, the SEC said in a statement.
BlockFi’s interest account allowed users to earn variable monthly interest on the cryptocurrency they held. The SEC ruled that the accounts were considered securities because the users effectively lent cryptocurrency to the firm.
In addition, BlockFi illegally operated as an unregistered investment company, the SEC said.
The regulator said BlockFi issued securities and held more than 40% of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers.
The order also found that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.
“This is the first case of its kind with respect to crypto lending platforms,” SEC chair Gary Gensler said in a press release. “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940.”
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