Are crypto assets a threat to global financial stability?
With the total market of crypto assets now valued at US$2.6 trillion, there is a growing concern around what they’ll do to the rest of the financial market. One major global financial industry watchdog is already raising the red flag.
The Financial Stability Board (FSB), which is based in Switzerland and monitors 24 countries around the world, is concerned that “structural vulnerabilities” in crypto markets, as well as an increasing interconnectedness with traditional financial services, can wreak havoc in the months and years ahead.
“Although the extent and nature of the use of crypto assets vary somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses,” the FSB argued in a report.
“Systemically important banks and other financial institutions are increasingly willing to undertake activities in, and gain exposures to, crypto assets… 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.”
The FSB went as far as to draw comparisons to the overexposure to the sub-prime mortgage bonds that caused the Global Financial Crisis in 2007-2008. “As in the case of the US sub-prime mortgage crisis, a small amount of known exposure does not necessarily mean a small amount of risk, particularly if there exists a lack of transparency and insufficient regulatory coverage.”
Perhaps surprisingly – given the volatility of cryptocurrencies such as Bitcoin – the FSB is most concerned about stablecoins, such as Tether, which it considers to leave consumers vulnerable to high levels of credit and operational risks, liquidity mismatches and the need for sudden runs of their reserves.
The FSB also noted that the energy requirements for crypto, as well as its capacity to be used for money laundering and in cybercrime, have the potential to undermine the broader market.
It is worth noting that in itself the FSB has no regulatory powers. It is, however, a highly regarded watchdog that advises the governments of the nations it monitors.