Financial Stability Implications of Multifunction Crypto Asset Intermediaries

Context: In a recent report, the Financial Stability Board (FSB) has highlighted the gaps in multi-function crypto asset intermediaries (MCI) operating globally. 

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• The report has recommended measures to enhance cross-border cooperation and information sharing to address the gaps. 
• The report has highlighted FTX collapse in November 2022, to underline the risk that occurs due to several different activities within the platform. 
• The risk is exacerbated by the lack of effective controls on their activities, poor disclosure of their corporate structure and conflict of interests due to trading in self-issued crypto assets. 

What is the Financial Stability Board?

• Mandate: FSB is an international body that monitors the global financial system to ensure international financial stability. 
• Collaboration: FSB works jointly with IMF to study trends and conduct early warning exercises. 
• Origin: It was established in 2009, after the G20 summit in London, to replace the Financial Stability Forum.
• Headquarters: Basel, Switzerland.
• Board Composition: The board includes all G20 major economies.
• Members: 68 member institutions comprising ministries of finance, central banks, and supervisory and regulatory authorities from all over the world. 

What are Multi-Function Crypto asset intermediaries?

• Definition: As per the report, Multi-Function crypto asset Intermediaries (MCI) are individual forms or groups of related firms that offer a range of crypto products and services related to trading. 
• Examples: Binance, Bitfinex and Coinbase. 
• Finances: The funding source for these platforms is the transaction fee generated in the trading-related activity and from operating a blockchain infrastructure for which they may collect some transaction validation fee. 

Risk Associated with Multi-Function Crypto Asset Intermediaries 

• Clashing Interests: These Multi-Function crypto asset Intermediaries have self-issued crypto assets and trade in the same, leading to a conflict of interest. This impacts market integrity, investor protection and financial stability. 
• Market-Related Vulnerabilities: Lack of liquidity and concentrated holdings coupled with opaque supply and circulation jointly allow the prices of MCI-issued crypto-assets to be inflated.
• Technological and operational vulnerabilities:   Multi-Function crypto asset Intermediaries have been a target of cyber-attacks and a number of them have had funds stolen by hackers in the past.

Also Read: RBI Starts Pilot Programme For Wholesale Digital Rupee

Crypto based Threat in India

• Money Laundering: WazirX Crypto-Currency Exchange was accused of Money Laundering via purchase & transfer of virtual crypto assets. 
• Market Manipulation: CoinDCX was accused of wash trading, which involves artificially inflating the trading volume of a cryptocurrency by buying and selling it to oneself. 
• Hacking: Key data of over 3.25 lakh Indian users were leaked to the dark web in BuyUCoin hack. 

Source: FSB