Enhancing transparency and awareness of the risks associated with crypto-assets and their social cost are critical aspects of this approach. Public authorities will also need to address those social costs: for instance, cryptos’ ecological footprint cannot be ignored in view of environmental challenges. Additionally, the experience of FTX, which expanded massively with little oversight, underscores the importance of global crypto regulation and regulatory cooperation. The Financial Stability Board’s  recommendations[39] for the regulation and oversight of crypto-asset activities and markets need to be finalised and implemented urgently, also in non-FSB jurisdictions. The Basel Committee on Banking Supervision's standard on the prudential treatment of banks' crypto-asset exposures is a positive step in this direction. It stipulates conservative capital requirements for unbacked crypto-assets with a risk weight of 1,250%, as well as an exposure limit constraining the total amount of unbacked crypto a bank can hold to generally below 1% of Tier 1 capital. It will be key for the European Union and other Basel jurisdictions to transpose the Basel standard into their legislation by the 1 January 2025 deadline[40]. However, regulation alone will not be sufficient. Innovating: digital settlement assets and central bank digital currencies Third, the public sector needs to contribute to the development of reliable digital settlement assets. Central banks are innovating to provide a stability anchor that maintains trust in all forms of money in the digital age. Central bank money for retail use is currently only available in physical form – cash.

Risks from the growing centralisation of the crypto ecosystem The crypto ecosystem’s move away from its original goals towards more centralised forms of organisation, typically without regulatory oversight, is giving rise to substantial costs and an array of contradictions. There are two major facets to this phenomenon. The re-emergence of classic financial sector shortcomings and vulnerabilities First, dependence on third-party intermediaries, many of which are still unregulated, has resulted in market failures and negative externalities, which crypto was initially designed to sidestep. The crypto ecosystem, for instance, has cultivated its own concentration risks, with stablecoins assuming a key role in trading and liquidity provision within decentralised finance markets. [23] The difficulties faced by prominent stablecoins in the past year likely contributed significantly to the noticeable downturn in these markets. [24] Indeed, stablecoins often pose greater risks than initially thought. They introduce into the crypto space the kind of maturity mismatches commonly seen in money market mutual funds. As we have seen in the past year, redemption at par at all times is not guaranteed, risks of runs and contagion are omnipresent, and liquidation of reserve assets can lead to procyclical effects through collateral chains across the crypto ecosystem. Another episode of instability driven by high concentration risk was the fall of the crypto exchange FTX. Initially the crisis seemed to primarily affect liquidity, but it quickly evolved into a solvency crisis. This situation arose due to FTX’s inadequate risk management, unclear business boundaries and mishandling of customer funds.