Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets

Unbacked crypto assets have grown rapidly, and while their primary use case remains speculation, there are growing interlinkages with wider financial services. This Fintech Note explores approaches authorities can take to harness any benefits, while managing risks.
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Volume/Issue: Volume 2022 Issue 007
Publication date: September 2022
ISBN: 9798400221361
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Summary

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. We recommend that global bodies 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.