The FSB requires international supervision of multi-functional crypto companies

The Financial Stability Board (FSB) says multi-functional crypto-asset intermediaries (MCIs) are critical to the crypto ecosystem.
However, their business models have vulnerabilities and risks that could negatively impact global financial stability.
The FSB recommends an international approach and cooperation in the control of these MCIs.

The Financial Stability Board (FSB), an international organization that monitors and advises on the global financial system, wants more cooperation between national regulatory bodies regarding crypto regulation.

In particular, the FSB called for cross-border cooperation between different regulators around the world in the regulation of multi-functional crypto-asset intermediaries (MCIs). While critical to the crypto ecosystem, there are risks and vulnerabilities associated with crypto behemoths that combine services and products.

These risks can affect global financial stability, the FSB said.

Vulnerabilities of MCI

In its report published on Tuesday, the FSB defined MCIs as “individual organizations or groups of affiliated organizations – such as FTX (before its demise) – that combine a wide range of crypto-asset services, products and activities.”

At the Swiss-based firm, these services and products typically refer to business platform operations and are similar to those handled by traditional finance.

However, unlike crypto, traditional financial platforms do not offer all of these under one entity. Restrictions are often implemented to “prevent conflicts of interest and promote market integrity, investor protection and financial stability.”

While weaknesses in crypto, including leverage, liquidity imbalances, and technology are not the same as traditional finance, the combination of practices only serves to exacerbate potential vulnerabilities.

Examples of integrated activities in MCIs include proprietary trading, marketing, and lending and borrowing. The FSB pointed out that this year's collapse of crypto-friendly banks is an indication of how dangerous the interconnectedness can be.

The FSB warned in the report that allowing crypto firms to combine different activities, as is the case with MCIAs, exposes vulnerabilities that could have a negative impact on the global financial system. Therefore, a global approach to regulatory enforcement in crypto-asset markets is needed, the agency recommends.

The latest report, Concerns and Issues, is a follow-up to the FSB's February 2023 report on decentralized finance (DeFi) risks to financial stability. The FSB also issued a global regulatory framework for crypto, which the G20 approved in September this year.

As highlighted last week, crypto exchange Binance agreed to a historic $4.3 billion fine in a settlement with US authorities, leading to the resignation of its founder and then CEO.