The Financial Stability Board (FSB) report, along with other sources, provides important insights into the impact of multi-functional cryptocurrency asset intermediaries (MCIs) and key market events such as the FTX collapse and cryptocurrency market turmoil in November 2022. May/June 2022. These incidents highlighted the important role and potential risks posed by MCI in the cryptocurrency market.
MCI is a group of companies or affiliates that provide a wide range of services and products centered around a trading platform. Many engage in proprietary trading and investing, while some issue, promote, and distribute crypto assets, including stablecoins. Structural vulnerabilities that could be exacerbated in the market include issues related to leverage and liquidity mismatches. Their vulnerabilities are similar to traditional finance, including technical and operational vulnerabilities, leverage, liquidity mismatches, and interconnections. Some combinations of functions within a single MCI can amplify these vulnerabilities, especially in the absence of effective controls, operational transparency, and conflict of interest management. MCI’s centrality, concentration, and market power in the cryptocurrency asset ecosystem poses additional risks. These vulnerabilities can spread into traditional financial systems through a variety of channels..
According to the FSB’s assessment, the threat to financial stability posed by MCI failure is currently limited, but significant information gaps make it a qualitative assessment. The financial stability impact of MCI will depend on developments in the crypto-asset sector, the evolution of MCI’s role, and the implementation and enforcement of comprehensive and consistent global regulation. MCI’s global reach complicates regulation due to its complex organizational structure, integration into cryptocurrency-friendly jurisdictions, and potential for regulatory arbitrage.
The collapse of FTX and other major companies in 2022 had a major impact on the cryptocurrency market, triggering price falls and regulatory crackdowns. This incident, along with the initial collapse of the stablecoin TerraUSD, had a major impact on Bitcoin and other major tokens. Bitcoin in particular lost more than 65% of its value in 2022, plummeting to its lowest level since 2020. The overall cryptocurrency market has also taken a hit, falling from a high of $3 trillion in November 2021 to a low of $796 billion in 2020. 2022 after the FTX collapse. But the market has shown resilience, recovering to more than $1 trillion in value by 2023. Venture capital investment in cryptocurrency companies also declined, with a significant decline in the third quarter of 2022 compared to the beginning of the year. This decline was not just due to the FTX failure, but was part of a broader slowdown that began with the collapse of the TerraUSD ecosystem.
Analysis of these developments highlights the complex interplay between MCI, market dynamics, the regulatory environment and financial stability. The evolution of cryptocurrency markets, especially in light of recent upheavals, will be critical in shaping future regulatory approaches and market resilience.
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