The Financial Stability Implications of Multifunction Crypto-asset Intermediaries
The May/June 2022 crypto-asset market turmoil and the collapse of FTX in November 2022 highlight that multifunction intermediaries represent a critical part of the crypto-asset ecosystem and can exacerbate structural vulnerabilities in those markets.
Multifunction crypto-asset intermediaries (MCIs) are individual firms, or groups of affiliated firms, that combine a broad range of crypto-asset services, products, and functions typically centred around the operation of a trading platform. Many MCIs have proprietary trading and investment functions, while some are also involved in issuing, promoting, and distributing crypto-assets or related products, including so-called stablecoins.
MCI vulnerabilities are not very different from those of traditional finance, including leverage, liquidity mismatch, technology and operational vulnerabilities, and interconnections. However, some combinations of functions within a single MCI could exacerbate these vulnerabilities. These vulnerabilities are further amplified by a lack of effective controls and operational transparency, poor or no disclosures, and conflicts of interest. There are also additional vulnerabilities stemming from the centrality of MCIs in the crypto-asset ecosystem and their concentration and market power. MCI vulnerabilities could spill over to the traditional financial system and the economy through various transmission channels.
Available evidence suggests that the threat to financial stability and to the real economy from the failure of an MCI is limited at present. Significant information gaps impair this qualitative assessment, but it is corroborated by the experience of recent failures of MCIs. Looking ahead, the financial stability implications of MCIs depend on how the crypto-asset sector develops and how the role of MCIs evolves within the sector, as well as on the effective implementation and enforcement of comprehensive and consistent regulations to the crypto-asset markets globally.
looks at the structure and functioning of MCIs and assesses relevant financial stability risks;
describes data gaps and identifies potential indicators to monitor MCI developments; and
discusses implications for policy consideration by the FSB and relevant standard-setting bodies.