FTX Collapse Exposes Weaknesses in Multifunction Crypto-Asset Platforms

The Financial Stability Board (FSB), a global entity overseeing the financial services sector, published a report on November 28 highlighting the potential need for more stringent regulations in the cryptocurrency industry, especially in the wake of the FTX collapse.

The FSB's report points out that the chaos following the downfall of the FTX cryptocurrency exchange exposed weaknesses in multifunction crypto-asset intermediaries (MCIs). These platforms, which merge trading and related services, share vulnerabilities common in traditional finance, such as issues with leverage, liquidity mismatch, and technological and operational risks. The FSB notes that these vulnerabilities can be intensified in MCIs due to their involvement in activities like proprietary trading, market making on their platforms, and crypto-asset lending and borrowing.

“MCI vulnerabilities are not very different from those of traditional finance, including leverage, liquidity mismatch, technology and operational vulnerabilities, and interconnections.”

The report emphasizes the heightened risks due to inadequate controls and transparency in these platforms. It also highlights additional concerns arising from the central role of MCIs in the crypto-asset ecosystem, their market dominance, and concentration.

The FSB urges regulators to evaluate if existing recommendations by the FSB and the International Organization of Securities Commissions are sufficient to mitigate crypto-related risks in the wider financial system. The report suggests that more efforts might be necessary to improve international cooperation, information sharing, and to fill identified knowledge gaps.

In July, the FSB finalized its global crypto framework recommendations and, in September, released joint policy recommendations with the International Monetary Fund (IMF) at the G20's request. Shortly after, the G20 adopted these IMF-FSB recommendations as part of their regulatory strategy.