Key takeaways: 

• The Financial stability board reveals there is a need for increased regulation in the crypto industry.

• FSB emphasizes the necessity for global protective measures, using examples from cryptocurrency companies like FTX.

The Financial Stability Board (FSB), a global regulatory body overseeing financial institutions from G20 economies, has issued a strong caution regarding the potential destabilization of the broader financial system due to issues arising from complex crypto firms, such as FTX. 

In a recent report, the FSB emphasized the need for further assessments, citing “significant information gaps” that persist in understanding the risks associated with these entities.

The report, released on Tuesday, underscores the vulnerabilities inherent in “multifunction” crypto firms, urging the implementation of additional measures to safeguard against their potential tumultuous impact on the global financial landscape. 

The FSB’s analysis identified critical issues, including concerns over leverage, liquidity mismatches, and technological and operational weaknesses. 

These factors, coupled with a lack of effective controls, operational transparency, and adequate disclosures, create an environment ripe for financial instability. The report also highlighted potential conflicts of interest that could further amplify risks.

The FSB specifically pointed to the market turmoil following the collapse of the cryptocurrency exchange FTX as an illustration of the flaws in multifunction crypto-asset intermediaries (MCIs), which combine trading and related activities.

 According to the report, MCI vulnerabilities closely resemble those seen in traditional finance, including issues with leverage, liquidity mismatch, technology and operational vulnerabilities, and interconnectedness.

The recent FSB report concludes by advocating for further efforts to enhance cross-border cooperation and information sharing to address the identified information gaps. In a rapidly evolving technological landscape, the FSB emphasizes the importance of staying ahead of potential risks associated with crypto activities.

Many crypto exchanges, including FTX, amalgamate functions that would traditionally be separate in traditional exchanges. FTX, in particular, serves as a noteworthy case study, allowing unlimited leverage to Alameda, experiencing liquidity mismatches, and being highly interconnected with the broader crypto ecosystem.

The FSB notes that the combination of functions assumed by intermediaries is exacerbated by other factors, as seen in the case of FTX. Weak controls, inadequate or absent disclosures, and significant conflicts of interest further compound the risks associated with these entities.

As global financial markets continue to grapple with the implications of the crypto industry’s rapid growth, the FSB’s warnings serve as a call to action for regulators, central banks, and treasury officials to address the challenges posed by multifunction crypto firms and ensure the stability of the broader financial system.