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The Financial Stability Board (FSB) has raised concerns over the ability of existing stablecoins to pass new risk management rules currently in development. This comes after the collapse of FTX and other events over the past year, which exposed the volatility and structural vulnerabilities of crypto-assets.

In a letter to G20 finance ministers, FSB chair Klaas Knot emphasised the need for regulatory oversight, stating that a key failure within the crypto-asset ecosystem could transmit risks throughout the system. If traditional finance becomes linked to crypto-asset markets, risks could spill over into the broader financial system, making threats to financial stability even more acute.

Knot warned that stablecoins, which are seen as an effective transmission mechanism for financial shocks, pose a significant risk to financial stability. The FSB has been tasked with creating a comprehensive regulatory framework for crypto-assets, expected to be completed by the end of this year.

Among the FSB's recommendations for stablecoins are strengthened governance frameworks, clarifying and reinforcing redemption rights, and maintaining effective stabilisation mechanisms, among other revisions. However, Knot stated that many existing stablecoins would not meet these high-level recommendations or international standards.

The FSB is also increasing its scrutiny of the opaque world of decentralized finance (DeFi), as it fears the potential for spill-over risks to traditional finance.

In conclusion, regulatory oversight is crucial for the crypto-asset ecosystem, and the FSB's work highlights the need for stablecoins to meet high-level recommendations and international standards. The FSB's comprehensive regulatory framework for crypto-assets is expected to provide guidance to strengthen governance frameworks, reinforce redemption rights, and maintain effective stabilisation mechanisms.

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