Financial Stability Risk Assessment of Crypto Assets
A very rapidly changing market is the crypto-asset market and could reach a point where they represent a warning sign for global financial stability due to their scale, structural vulnerabilities and growing interconnectedness with the traditional financial system.
The market capitalization of crypto-assets increased 3.5 times in 2021 to reach $2.6 trillion, but crypto-assets remain a small part of the total assets of the global financial system. Direct connections between cryptoassets and systemically important financial institutions and major financial markets, while growing rapidly, are currently limited. Nevertheless, institutional involvement in crypto-asset markets, both as investors and service providers, has increased over the past year, albeit from a low base. If the current trajectory of growing scale and interconnectedness of crypto-assets with these institutions were to continue, it could have implications for global financial stability.
This report examines developments and associated vulnerabilities in three segments of the crypto-asset markets: unsecured crypto-assets (such as Bitcoin); stablecoins; and decentralized finance (DeFi) and other platforms where crypto-assets are traded. These three segments are intertwined in a complex and ever-changing ecosystem and should be considered holistically when assessing financial stability risks. The report notes that while the extent and nature of crypto-asset use varies somewhat across jurisdictions, risks to financial stability could quickly escalate, highlighting the need for rapid and preventive assessment of possible policy responses.
DeFi has recently become a rapidly emerging sector, providing financial services using both unbacked crypto-assets and stablecoins. Additionally, a relatively small number of crypto-asset trading platforms bundle multiple types of services and activities, including lending and custody. Some of these platforms operate outside the regulatory scope of a jurisdiction or do not comply with applicable laws and regulations. This presents potential for risk concentration and highlights the lack of transparency in their activities.
The report highlights a number of vulnerabilities associated with crypto-asset markets. These include strengthening the links between crypto-asset markets and the regulated financial system; inadequate liquidity, credit and operational risks that make stablecoins vulnerable to sudden and disruptive runs on their reserves, with the potential to spill over into short-term funding markets; increased use of leverage in investment strategies; concentration risk of trading platforms; and the opacity and lack of regulatory oversight of the sector. The report also notes broader public policy concerns related to crypto-assets, such as low levels of investor and consumer understanding of crypto-assets, money laundering, cybercrime, and ransomware.
Due in part to the emergence of DeFi, the growth of stablecoins has continued, despite concerns about regulatory compliance, the quality and sufficiency of reserve assets, and risk management and governance standards. Currently, stablecoins are primarily used as a bridge between traditional fiat currencies and crypto-assets, which has implications for the stability and functioning of crypto-asset markets. If a major stablecoin fails, it is possible that liquidity within the broader crypto-asset ecosystem (including in DeFi) will become constrained, disrupting trading and potentially causing stress in those markets. This could also spill over into short-term funding markets if stablecoin reserves are liquidated in a disorderly fashion.
The FSB will continue to monitor developments and risks in the crypto-asset markets. It will explore the potential regulatory and prudential implications of unsecured crypto-assets, including steps FSB jurisdictions have taken or plan to take to address associated threats to financial stability. The FSB will also continue to monitor and share information on regulatory and supervisory approaches to ensure the effective implementation of its high-level recommendations for the regulation, supervision and oversight of so-called “global stablecoin” arrangements. “.
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