Great Crypto Crisis: The Prudential Regulation of Systemically Important Crypto Conglomerates

Abstract

Since the crypto winter began in early 2022, several market crashes and institutional collapses of crypto intermediaries, particularly Three Arrows Capital and, recently FTX—have ravaged the innovative financial ecosystem. Among global regulators, the major discourse is no longer the full prohibition of crypto-related activities but the protection of traditional financial systems from a “great” crypto crisis capable of disrupting financial stability. However, most of the existing regulatory frameworks lack clarity on major aspects of crypto ecosystem, especially relating to new associational risks and its potentials to drive systemic risks among crypto conglomerates. This paper examines the anatomy of recent crashes in the crypto ecosystem and highlights the limitations of existing global regulatory developments toward preventing these threats from potentially spreading to traditional financial systems. To these emerging concerns, the paper argues for the adoption of entity-based approach to crypto regulations. Specifically, it proposes the application of adjusted prudential regulations to a new category of systemically important crypto intermediaries (SICIs) similar to traditional systemically important financial institutions (SIFIs).

Keywords: Financial Stability, crypto conglomerate, financial crisis, FTX, Prudential regulations, SIFIs, digital currencies

JEL Classification: K00