FSB warns of crypto asset risk to global financial stability

The rapid growth of crypto asset markets could present a threat to global financial stability, according to a report – Assessment of Risks to Financial Stability from Crypto-assets- from the Financial Stability Board (FSB).

The report, “warns that the pace and scale of crypto asset expansion, their increasing interconnectedness with the traditional financial system, and related structural vulnerabilities, could cause financial stability risks to accelerate rapidly.

The Basel based organisation calls for timely and pre-emptive assessment of the policy responses available and steps to close potential regulatory gaps, arbitrage opportunities and fragmentation.

The report notes that crypto asset market capitalisation increased by 350% during 2021 to $2.6 trillion, although still a small percentage of aggregate assets in the global financial system.

The FSB identifies vulnerabilities associated with three parts of the crypto asset marketplace – unbacked crypto assets such as bitcoin, stable coins, and decentralised finance and crypto asset trading platforms.

Drilling down, it is concerned about the increasing linkages between crypto-asset markets and the regulated financial system as well as the liquidity mismatch, credit and operational risks that make stable coins susceptible to sudden and disruptive runs on their reserves.

It said that stable coin is used mainly as a bridge between traditional fiat currencies and crypto assets. If a stable coin were to fail, however, liquidity within the broader crypto asset ecosystem (including DeFi) could be constrained, resulting in trading disruption and potential stress in those markets.

This stress could also spill over into short-term funding markets if stable coin reserve holdings were liquidated in a disorderly manner, said the FSB.

The global body also raises red flags over the increased use of leverage in investment strategies, concentration risks at digital asset trading platforms, and opacity and a lack of regulatory oversight in some parts of the market.

The report noted that these issues may be heightened by low levels of investor and consumer understanding of crypto-assets, money laundering, cyber-crime and ransomware.

©Markets Media Europe 2022

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