Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
FinTech Notes, September 26, 2022
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- Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
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Bibliographic details
- Authors: Parma Bains, Arif Ismail, Fabiana Melo, Nobuyasu Sugimoto
- Published: September 26, 2022
- Series: FinTech Notes
- DOI: https://doi.org/10.5089/9798400221361.063
Overview
- Unbacked crypto assets are the oldest and most popular type of crypto assets, relying not on any backing asset for value but instead on supply and demand.
- They were originally developed to democratize payments but are mostly used for speculation.
- Crypto assets were designed to disintermediate financial services, but centralized entities, such as exchanges and wallet providers, offer key functions to users and sustain the necessity of trust in one or several entities.
- At present, many of these entities are not covered by existing conduct, prudential, or payment regulations and can generate risks to market integrity, market conduct, and potential financial stability.
Key findings
- Unbacked crypto assets rely on supply and demand rather than any backing asset.
- The original purpose—democratizing payments—has largely given way to use for speculation.
- Centralized service providers (exchanges, wallet providers) reintroduce points of trust and centralization despite design goals of disintermediation.
- Regulatory gaps exist: many entities providing key functions are not covered by existing conduct, prudential, or payment regulations.
- These gaps can generate risks to market integrity, market conduct, and potential financial stability.
Risks identified
- Market integrity risks arising from entities and activities not covered by existing regulation.
- Market conduct risks associated with centralized intermediaries and user interactions.
- Potential financial stability risks if unbacked crypto asset activities and providers grow large or interconnected enough to affect broader financial systems.
Policy recommendations and standards
- Global bodies should work to develop common taxonomies that can inform global and cross-sectoral standards while improving data insights.
- Standards should be risk-based, with greater requirements on entities and activities that generate more risk.
- Crypto asset service providers that deliver core functions and generate key risks should be licensed, registered, or authorized.
Publication identifiers (as presented in the source)
- Pages: 45
- Volume: 2022
- Issue: 007
- Series: Fintech Notes No 2022/007
- DOI: https://doi.org/10.5089/9798400221361.063
- Stock No: FTNEA2022007
- ISBN: 9798400221361
- ISSN: 2664-5912
Source: Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets, Parma Bains, Arif Ismail, Fabiana Melo, Nobuyasu Sugimoto, September 26, 2022.
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- Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets