What are multifunction crypto-asset intermediaries?
The international Financial Stability Board (FSB)’s latest report on crypto-asset intermediaries sought measures to enhance cross-border cooperation and information sharing among local authorities.
This is to effectively regulate and address gaps in multi-function crypto-asset intermediaries (MCIs) operating globally.
Specifically referring to the FTX collapse in November 2022.
Highlights potential risks associated with MCIs that combine different activities within the platform.
The report defines MCIs as individual firms, or groups of affiliated firms that offer a range of crypto-based services, products and functions which primarily revolve around operating of the trading platform.
Examples include Binance, Bitfinex and Coinbase.
In the traditional financial landscape, the functions are provided by separate entities, instead of the same entity.
This prevents conflict of interest and promotes market integrity, investor protection and financial stability.
The primary source of revenue for these platforms are the transaction fees generated from trading-related activities.
Trades from alternative platforms may also indirectly drive additional demand for other services offered by the platform.
These may include prepaid debit cards and lending, among other services.
This shows that the aspirations of MCIs extend beyond just trading to becoming a “one-stop shop” for crypto-based services.
FSB’s report observes that the magnitude of these revenue sources is unclear because of the limited publicly disclosed information.
What about risk management?
The report observes that most MCIs are not transparent about their corporate structure.
They are privately held.
They only disclose ,typically for a small part of their business, specific to a jurisdiction.
Much of the available information has surfaced through press coverage, court filings and regulatory actions and not public disclosures.
The watchdog observed that MCIs failed to create a “meaningful separation” between potentially conflicting business lines, and provide clear account of transactions and activities or audit practices.
Poor risk management, may make it easier for insiders to engage in misconduct that magnifies MCI vulnerabilities.
The lack of transparency could also mean that risks from lack of effective governance or lack of profitability of the business model would be hidden until the negative shocks fully materialise.
Financial Stability Board
Based on available evidence, the threat to global financial stability and to the real economy from the failure of an MCI is presently “limited.”
Recent experience about failure or closure of “crypto-asset-friendly” banks reveal the
prevalence of concentrated deposit exposures to firms whose business models rely in some form on crypto assets.
In March this year, Silvergate Bank had to wind down its operations and voluntarily liquidate.
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