A worldwide watchdog has warned that the expanding crypto-assets market might represent a major danger to financial stability if authorities don’t take action.
According to the Financial Stability Board (FSB), which monitors financial authorities in 24 countries, crypto markets have the potential to cause significant disruption to the global economy because of their size and structural vulnerabilities, as well as their increasing interconnection with traditional financial systems.
However, financial stability risks might quickly develop, underlining the need for early and preemptive consideration of potential policy responses,” a study from Switzerland’s Financial Stability Board said in a statement.
Systemically significant banks and financial institutions are becoming more eager to engage in and acquire crypto-asset risks. Derivatives and other leveraged instruments referencing crypto assets have become more common, as have more complicated investing methods.
This might have a significant impact on global financial stability if the present trend of increase in the scope and interconnection of crypto assets to these institutions continues.
Crypto Market And Global Financial System
The survey predicted that the market value of crypto assets will grow 3.5 times in 2021 to $2.6 trillion. There was a comparison to the subprime mortgage exposure that precipitated the financial crisis of 2007-8, although crypto assets are still modest in comparison.
Crypto asset markets might have a significant impact on the balance sheets and liquidity of financial institutions, according to the Financial Stability Board (FSB).
For example, as shown during the US sub-prime mortgage crisis, a low level of disclosed risk doesn’t always translate into low levels of danger, especially when lacking transparency and inadequate regulatory protections are present.
Unbacked currencies like bitcoin, reserve asset-backed stable coins like tether, decentralized finance (Defi), and crypto-asset trading platforms were all studied for their weaknesses. All of these services are only available online and are not overseen by a single authority.
With the unstable coin structure, users leave themselves open to severe credit and operational risks, as well as liquidity mismatches and abrupt runs on their reserves. This is a major cause of worry. Additionally, an unbacked currency is susceptible to price fluctuation. Using crypto assets for money laundering, ransomware, and other criminal activities, as well as the environmental harm caused by the energy-sucking methods they use, raises further questions.
No nations are subject to FSB regulation, although the organization does monitor the financial sector and provide guidance to decision-makers on best practices. Bank of England chief Andrew Bailey is a member of the group. There are hazards associated with purchasing cryptocurrencies like those recommended by celebrities like Kim Kardashian West and the Financial Conduct Authority.
By continuing to watch trends and dangers in crypto-asset markets as well as exploring supervisory implications of unbacked assets, FSB member states will be able to handle related concerns to financial stability.
As a result of the crypto asset market’s worldwide and diversified character, authorities throughout the world must prioritize cross-border and cross-sectoral collaboration, according to the paper.
We need to work together and share information to improve monitoring and reduce regulatory arbitrage to stay up with the rapid expansion of crypto assets.
Stabilization VS Systematic Risk
According to the Federal Reserve System, Financial Stability Board (FSB), and the Biden administration, stablecoins represent a significant danger to global financial stability since they are unique cryptocurrencies.
Stablecoins have emerged as a new threat to global financial regulators after Bitcoin and Libra, Facebook’s doomed digital currency. The Financial Stability Board (FSB) produced a study on the hazards of crypto assets on February 16 that explicitly addressed these cryptocurrencies.
For a digital currency that was designed to “put a brake on Bitcoin’s volatility and to rightly bring a bit of stability into this sphere,” stable coins status as the villain of the financial world may surprise you” – FRANCE 24 spoke with Neoma Business School economist and cryptocurrency expert Nathalie Janson.
Cryptocurrencies are known as “stablecoins” are those for which the price rarely changes since they are based on a reference such as the United States dollar. For instance, the most well-known and extensively used stablecoin, Tether, has a value that is always equal to one US dollar.
Stablecoins, such as Tether, USD coins, and binance USD, allow cryptocurrency investors to keep an eye on their portfolio’s actual dollar worth without having to deal with the ups and downs of volatile exchange rates. Some services even require users to first convert their crypto money into stablecoins before converting it into conventional currency like dollars or euros.
There must always be an equal quantity of dollars in reserve for “stable” cryptocurrencies to ensure their worth. When Tether announced in December 2021 that it had 78.2 million USD in the bank to meet its circulating supply, the creators were confident.
These days, tethers are worth about the same as a bank “, Financial analyst Vincent Boy stated. In December 2021, the total market value of all stablecoins was around USD 157 billion, up from $5.6 billion at the start of 2020 ” in accordance with the FBS.
Financial regulators throughout the globe are on edge as the value of Tethers has risen sharply. Stablecoins were a topic of discussion during the Federal Reserve’s August 2021 meeting in the United States. Posed by Boy, “The questions being asked include how to verify if [the inventors] have the requisite reserves and whether Tether is going to collapse.”
The increasing popularity of stable coins indicates the “democratization of bitcoin investing.” “, Boy opined. It’s a win-win situation when more individuals desire to swap their dollars for alternative currencies like Bitcoins, Monero, or Litecoins.
Tether and other stable coins are no longer owned just by cryptocurrency insiders, but by conventional investment funds, corporations, and even banks. ” “, Janson said. It is this “growing interconnectivity with the conventional financial system” that the FSB refers to.
It is believed by the FSB and the US Federal Reserve that the failure of these stable coins might have far-reaching consequences for existing financial markets.
Right now, the danger is just perceived. “The financial power stablecoins have is enormous, but the central banks can compensate for losses if there is a crisis without harming their balance sheets too much,” Boy added.
Tether and other stable coins might “reach a systemic magnitude, meaning they have become ‘too large to fail,'” if they continue to expand at the same rate as in previous years “Then, he said,
There is no possibility of stable coin developers failing as long as they have adequate reserves. Stablecoin issuers are not subject to a standardized set of requirements when it comes to reserve assets,” according to banking regulators.
Since audits of stable coin producers’ reserves aren’t always conducted by reputable institutions or by internationally recognized norms, the Financial Stability Board (FSB) is forced to trust their claims at face value for the moment. Tether was generally regarded as a hoax only three years ago – hardly comforting for a cryptocurrency that is now at the heart of the whole financial sector.
However, there is still an issue. After the financial meltdown of 2008, the authorities have become fixated on a fresh liquidity crisis.
The Effect Of Cryptocurrencies on the Global Markets
However, cryptocurrencies, which have gained a lot of popularity owing to their decentralization ideas, as well as the possibility for large returns, are still very volatile, and their losses are more likely. For example, Bitcoin values soared from roughly $1,000 to a peak of more than $19,000 in 2017 before falling to around $3,000 a piece. Then, in the summer of 2021, Bitcoin fell to approximately $30,000 before rising again through the autumn of 2020, hitting new highs of over $60,000 by the end of the year.
For those who choose not to work with fiat money, cryptocurrencies provide a convenient and secure digital alternative.
Governments impose stringent capital restrictions and/or impose significant taxes on the movement of money. Legal or not, individuals and companies alike have taken advantage of the ability to avoid capital restrictions and taxes via the usage of cryptocurrency. As a result, several nations have begun to clamp down on the illicit use of cryptocurrencies for tax avoidance or illegal purchases or transactions in other jurisdictions.
Many investors are adding cryptocurrencies to their diverse portfolios because of their ease of use and ability to manage inflation. As with precious commodities like gold, the market’s lack of correlation makes cryptocurrencies an attractive risk hedge. ETFs and ETNs that invest in bitcoin and other cryptocurrencies have sprung out as a result of this.
Many worry about the effect on the larger market, comparable to how the collapse of mortgage-backed securities set off the global financial crisis in the first place. Some huge public firms, including Meta (previously Facebook) and Amazon, have market capitalizations more than the entire market capitalization of all cryptocurrencies, which is now between one and two trillion dollars. The new and dynamic asset class of cryptocurrencies, however, has the potential to swing in any way. Finally, many investors see cryptocurrency as either an investment vehicle for speculation or an inflationary hedge, although the market’s scale doesn’t pose a systemic concern as of 2021.