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As you know, the US banking regulator has proposed stricter regulations for risks related to cryptocurrency practices. This alarm call emphasizes potential risks and the need for supervision to mitigate them. The news motto is to ensure financial stability due to the integration of traditional banking and digital assets.
Challenges in Bank Supervision
The news highlights the initiatives of US Banking Regulator Michael Hsu, who advocates for oversight of the risks and threats that cryptocurrency and other fintech companies are putting on the financial market. The crypto world has been well established over the past few years, and now it is trying to find a place in the roots of traditional finance.
Michael said cryptocurrency risks needed robust monitoring at the conference the European Banking Authority and European Central Bank hosted. He further explained the growing intricacy of the financial system. In this regard, the notion of merging banking institutions and non-bank organizations as-it-is raises an alarming situation. Because the financial atmosphere feels worried, the happenings demand supervision through various protocols. Hsu uncovered examples associated with this intertwined issue.
- The fluctuations (rise and fall) in cryptocurrency markets
- Growth in nonbank property servicing and private credit
- The recent collapse of a financial middleware company, Synapse
From his point of view, the examples mentioned above show how the developments in the roles, vulnerabilities, and interrelationships between banks and nonbanks are called into question.
Effectiveness of Current Supervision
Besides citing these examples and their tendencies to create risks, Hsu raised another interlinking issue: the 2022 crypto market collapse. Though the crypto market devastation was about $2 trillion in value, the banking institutions survived and stood still.
However, the issue was raised to spread awareness about monitoring and constant crypto risk mitigation. He assigned this issue to competent supervision and claimed it was “not luck.” Instead, the outcome of monitoring was ensuring that crypto operations were safe, sound, and proportionate.
Need for Risk-Based Supervision
Soon after the discussion, it was time to implement a risk-based approach that remained firm and adaptable in response to any upcoming threats. He emphasized how regulation needs to change to keep up with the growing threats that financial technology and digital innovation represent. This comprises:
Monitoring Emerging Risks and Trends
Regulators must monitor the latest developments in digital assets and fintech companies. The aim is to understand the nature and effects of upcoming threats and urgently address expanding risks, if any.
Assessing the Impact of Digital Assets on Traditional Banking
Hsu assigned regulators the duty to analyze the interaction of digital assets with traditional banking systems. They must develop potential solutions to risks that benefit asset classes, including managing risks and capitalizing on opportunities.
Ensuring Safe, Sound, and Fair Crypto Activities
Regulators must establish new policies and guidelines for those banks actively involved in cryptocurrency activities, such as trading, buying, and selling. The aim is to ensure safe working, risk management, and transparent procedures to stabilize faith among financial institutions.
