The outgoing chair of the Financial Stability Board (FSB), Klaas Knot, has warned that interconnections between the digital asset sector and traditional finance (TradFi) are nearing a “tipping point,” creating potential risks.
The FSB Plenary, the decision-making body of the FSB—an international organization that monitors and makes recommendations about the global financial system—met in Madrid on June 11 to discuss key priorities for global financial stability.
Speaking at the event, Knot said that “technological innovation is transforming the financial sector. It’s adding new layers of complexity. And it’s doing so at speed.”
Knot, whose tenure as FSB Chair will end on June 30, warned that part of this increased complexity is down to the systemic risk the growing digital asset sector poses to TradFi.
“At the FSB, we have long maintained that crypto does not yet pose a systemic risk, but recent developments suggest we may be approaching a tipping point,” said Knot, according to a De Nederlandsche Bank transcript of his speech. “Barriers for retail users have dropped significantly, particularly with the introduction of crypto ETFs. The interlinkages with the traditional financial system continue to grow.”
He particularly highlighted stablecoins as a potential area of concern, noting that “stablecoin issuers, for example, now hold substantial amounts of U.S. Treasuries. This is a segment we must monitor closely.”
Systemic stablecoin concerns
Many lawmakers and regulators around the globe have also identified the risk that certain stablecoins pose.
The European Union’s landmark Markets in Crypto-Assets (MiCA) Regulation—the stablecoin provisions of which came into force last June—came with strict requirements for stablecoin issuers, including that they must maintain full reserves, undergo regular audits, and secure approval from a national authority.
According to MiCA, some stablecoins may also be considered ‘significant’ or ‘systemic’ if they meet any three of seven criteria, including having more than €5 billion ($6.28 billion) in reserves, over 10 million users, if it processes over €500 million ($577.3 million) daily if it’s used for payments on a global scale, or based on its level of interconnected with the financial system.
For stablecoins that fall into this category, MiCA mandates additional measures, which have been compared to the regime applied to classify global systemically important banks, and the European Banking Authority (EBA) will have supervisory responsibilities for issuers of these stablecoins.
Meanwhile, in the United Kingdom, where digital assets remain largely unregulated, the Financial Conduct Authority (FCA) is progressing stablecoin regulation alongside the Bank of England (BOE), the latter of which is expected to have oversight of stablecoins that “operate at systemic scale.”
In his speech to the FSB Plenary, Knot reiterated the need for such regulation, saying, “the crypto ecosystem will continue to evolve—and so must our regulatory frameworks.”
Industry response
The comments of the outgoing FSB Chair garnered a swift response from some industry figures.
Nick Jones, co-founder and CEO of Zumo, a decentralized mobile wallet and payments platform built on blockchain technology, gave Knot’s concerns short shrift.
“Given the widespread turmoil in the traditional financial system in recent years, the industry should be championing alternative financial solutions, not panicking as they gain traction,” Jones told CoinGeek. “It’s clear many people feel locked out of the incumbent system and are seeking viable alternatives. A resilient future financial system should surely seek to incorporate new ideas and structures that will provide added value for consumers.”
He added that Zumo was seeing “increased institutional and retail interest in digital assets, a wave of crypto IPOs, and a host of deals that draw TradFi and DeFi closer together.”
Rather than closing off doors to booming digital assets, such as stablecoins, Jones suggested that the FSB “looks through a different lens” and recognizes that stablecoins and other digital assets “have significant potential to fortify financial resilience by introducing cost savings, faster transaction processing, and advanced security features underpinned by cryptographic principles.”
Jones said the focus should be on “getting the burgeoning regulatory regimes right for our nascent sector, ensuring that consumers are fully protected whilst giving innovation the required room to breathe.”
For his part, FSB Chair Knot also highlighted some of the benefits provided by innovative technologies, namely that “technology has made financial services faster, more accessible, more efficient. And in some areas, like AI, we have only started to see its full impact.”
Knot’s speech in Madrid was accompanied by the FSB Plenary confirming Andrew Bailey, Governor of the BOE, as the next FSB Chair for a three-year term beginning on July 1 this year.
Watch: Richard Baker on engineering a smarter financial world with blockchain
title=”YouTube video player” frameborder=”0″ allow=”accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share” referrerpolicy=”strict-origin-when-cross-origin” allowfullscreen=””>
