News Excerpt:

The Financial Stability Board (FSB) in their latest report assessed the risks associated with multi-function crypto-asset intermediaries (MCIs), emanating from their structural vulnerabilities.

Summary of the report:

Structural Vulnerabilities:

•  MCIs combine various crypto services, leading to conflicts of interest and operational risks.
• The collapse of FTX (Futures Exchange) in November 2022 is cited as an example, highlighting the consequences of inadequate controls, operational transparency, poor disclosures, and conflicts of interest within MCIs.

Transparency and Governance:

• The report observes that most MCIs are generally not transparent about their corporate structure.
• Further, they are privately held. Even if they disclose information, the report observes, it is typically for a small part of their business, specific to a jurisdiction.
• Much of the available information has surfaced through press coverage, court filings and regulatory actions and not public disclosures.  

Risk Management & operational issue:

• Poor risk management in MCIs may lead to misconduct, hidden risks, and inflated prices for self-issued crypto assets.
• The FTX collapse exemplifies issues like undisclosed fund diversion, preferential treatment, and lack of risk disclosure.

Concentration Risk:

• The report lists market dominance and concentration among potential vulnerabilities. It argues that one or more MCIs could become the major source of liquidity in crypto-asset markets.
• This would not be ideal for realising the correct price as per market dynamics and existing conditions.
• High concentration alongside hosting a multitude of services could also facilitate anti-competitive behaviour, further amplifying the ecosystem’s vulnerabilities.
•    For example, MCIs may raise entry barriers and increase costs for users to switch to a competitor.

Cross-Border Cooperation:

•  The report calls for improved cooperation to regulate MCIs globally and address regulatory gaps.
•   The reference to the FTX collapse underscores the importance of international collaboration in regulating crypto-asset intermediaries. 

Conclusion:

The report collectively provides a comprehensive understanding of the challenges and risks associated with the operation of multi-function crypto-asset intermediaries in the global financial landscape. Thus, regulators and industry players should collaborate to establish robust frameworks that promote market integrity, investor protection, and financial stability in the evolving crypto landscape.