Definition ∞ Risk-based supervision is a regulatory approach where oversight efforts are prioritized and tailored according to the level of risk posed by financial institutions or activities. This method allocates supervisory resources more efficiently by focusing greater attention on areas with higher potential for financial instability, consumer harm, or illicit activity. Regulators assess the specific risks associated with an entity’s business model, products, and operational complexities to determine the intensity and nature of oversight. It allows for a more dynamic and adaptive regulatory framework compared to a uniform approach.
Context ∞ Applying risk-based supervision to the digital asset sector is a significant challenge for regulators, who must identify and assess novel risks associated with blockchain technology and decentralized finance. Debates often concern the appropriate methodologies for evaluating these new risk profiles and the data required for effective oversight. Future regulatory initiatives are likely to increasingly adopt and refine risk-based approaches to address the rapidly evolving landscape of digital assets.
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