Emerging challenges, openings in managing crypto investments

In this photo illustration, the FTX app is seen on a phone on November 10, 2022, in Atlanta, Georgia. PHOTO | GETTY IMAGES

As the digital assets landscape evolves, the Financial Stability Board (FSB) has made recommendations to establish a global regulatory baseline to promote a supervisory and oversight framework for crypto assets.

The framework is technology-neutral and focuses on underlying activities and risks to help foster safe innovation.

Crypto-assets are a type of digital asset that depend primarily on cryptography and distributed ledger or similar technology.

The FSB in its crypto-assets report published in February 2022 concluded that crypto-asset markets are fast evolving and could reach a point where they pose a threat to global financial stability.

Digital assets have become a growing alternative class with an estimated market capitalisation of over $1 trillion.

FSB notes in its report issued in July 2023 that the crypto-asset market has experienced significant turmoil since early 2022.

In May 2022, a sharp decrease in crypto-asset prices demonstrated that the high volatility of crypto-asset markets can lead to sudden market strains and failures of crypto-asset intermediaries.

These events highlighted that many crypto-asset activities involve economic functions similar to those in traditional finance and should be comprehensively regulated and brought into compliance with new or existing rules.

Most failed market participants operated without appropriate governance structures or in non-compliance with regulatory requirements.

This created vulnerabilities that have been identified by the FSB. They include liquidity and maturity mismatch, the build-up of leverage, inter-relationships between service providers, integration of multiple functions under related entities, weak regulatory oversight, and non-compliance with regulatory frameworks.

In light of these lessons, the FSB has made recommendations in three broad areas; safeguarding client assets; conflict of interest; and cross-border cooperation.

Financial service providers that control clients’ assets need to ensure they are segregated from their own assets.

This will mitigate the potential misuse of customer assets, which are exposed if the intermediaries experience financial distress.

FSB recommends regulators should require that crypto-asset service providers maintain adequate safeguards for customer assets and protect ownership rights, including in insolvency.

The borderless nature of crypto-assets underlines the importance of strong and consistent jurisdictional regulatory, supervisory and enforcement practices.

However, the FSB recommendations do not address all risks related to crypto-asset activities such as Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT); data privacy and cyber security.

Crypto assets are highly volatile and unregulated assets such as Bitcoin, Ethereum, and Litecoin.

Investors are advised to seek an understanding of all asset classes including seeking professional advice before committing their funds.

The writer is the CEO, of Scopes Markets Kenya. [email protected]