Do crypto assets pose a global threat to financial stability?

The Financial Stability Board (FSB) has claimed that the crypto assets market could pose a serious threat to financial stability if regulators fail to take action.

The FSB – which monitors financial authorities across 24 different geographies – claims it is concerned that the scale and structural vulnerabilities of crypto markets and the increasing interconnectedness with traditional financial systems have the potential to cause substantial disturbance to the global economy.

In a report, the Board said, “Although the extent and nature of use of crypto assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.

“Systemically important banks and other financial institutions are increasingly willing to undertake activities in, and gain exposures to, crypto assets. The prevalence of more complex investment strategies, including through derivatives and other leveraged products that reference crypto assets, also has increased.”

“If the current trajectory of growth in scale and interconnectedness of crypto assets to these institutions were to continue, this could have implications for global financial stability.”

According to the report, the crypto asset market capitalisation grew 3.5 times last year to a value of $2.6trn. It added that crypto assets remained a small part of the overall financial system, but likened the risk to that of the sub-prime mortgage exposure that sparked the 2008 financial crisis.

The FSB noted the structure of stablecoins as a particular concern, which can often leave consumers vulnerable to high credit and operational risks, liquidity mismatch and sudden runs on their reserves.

The report concluded, “Given the international and diverse nature of the crypto asset markets, authorities globally [need to] prioritise cross-border and cross-sectoral cooperation. Efforts to enhance monitoring and to minimise regulatory arbitrage through further cooperation and information sharing are needed to keep pace with crypto asset developments.”

PassFort head Donald Gillies said, “The crypto landscape is diverse and unsystematic, there are even recent reports of small-scale crypto mining taking place in Siberian villages, which makes the pressing need for oversight even more challenging. Indeed, navigating different international compliance and regulatory standards is difficult enough in traditional financial markets.

“For the crypto world to gain real viability, and not present the threat the FSB has outlined, unanimous regulation is required, aided by the right tools to streamline the adherence to new regulatory standards and help global authorities better co-operate across borders.”

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