“Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system,” reads the updated board assessment.
In 2021, crypto’s market cap ballooned almost fourfold to $2.6 trillion, notes the board. This, of course, is still just a fraction of the overall global financial system, though.
According to the report, three separate segments of crypto markets were analyzed. It addressed unbacked assets like Bitcoin; decentralized financed and trading platforms; and stablecoins, which are pegged to traditional, fiat currency. The “close, complex and constantly evolving” relationship between the segments was examined in the comprehensive paper.
“The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage. 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,” reads the report.
From Twitter
Travis Kling @Travis_Kling Feb 18
"The crypto market is in a weird spot right now - acting as a risk asset and going down on tightening fears while governments around the world act as a massive billboard for why decentralization matters. The former will pass. The latter is a multidecade trend."
The assessment takes a critical approach to potential market vulnerabilities. Among such vulnerabilities addressed are the increasing link between the crypto market and the normally regulated financial system, risks associated with stablecoin reserve runs, mismatched liquidity, money laundering and cyber-crime, reads information from the FSB. Additionally, the report also points to concerns regarding consumer and investor understanding of how the assets work.
Earlier this month, Under Secretary for Domestic Finance Nellie Liang testified before the House Committee on Financial Services to discuss ways the U.S. can protect against the risks associated with stablecoins. Liang’s testimony comes amid a broader effort by Congress and President Joe Biden to shield U.S. markets from any unwanted ancillary impacts of stablecoin adoption.
The FSB assessment also identified a number of areas in need of “ongoing vigilance.” Those areas include:
- The increased involvement of the bank sector in the crypto ecosystem, especially as it pertains to increased exposure to assets outside “appropriate regulatory treatment”
- Institutional investors increased exposure, especially as it pertains to the relative size of their overall portfolios
- The adoption of crypto as a means of payment
- The “growth, role and risks” that come with crypto trading platforms
- “Differing regulatory approaches” that could create arbitrage
“Given the international and diverse nature of the crypto-asset markets, authorities globally prioritize cross-border and cross-sectoral cooperation," the report adds. "Efforts to enhance monitoring and to minimise regulatory arbitrage through further cooperation and information sharing are needed to keep pace with crypto-asset developments.”
