Crypto-asset markets could trigger a global financial crisis: Report

According to the Financial Stability Board (FSB), an international watchdog, rapidly evolving crypto markets could pose a serious threat to global financial stability if regulators fail to act.

In a report published on February 16, the FSB, which oversees the financial authorities of 24 countries, examined potential vulnerabilities relating to unbacked crypto assets such as bitcoins, stablecoins as well as decentralized finance (DeFi) as well as platforms. of crypto trading.

The global watchdog, in its report, expressed concern that the scale and structural vulnerabilities of crypto markets, in addition to growing interconnectedness with traditional financial systems, could significantly disrupt the world. ‘Mondial economy.

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“While the extent and nature of crypto-asset use varies somewhat across jurisdictions, risks to financial stability could quickly escalate, underscoring the need for rapid and timely assessment. preventive of possible policy responses,” the report notes.

“Banks and other systemically important financial institutions are increasingly willing to undertake business and gain exposure to crypto assets. ‘other leveraged products that reference crypto assets, also increased,’ he added. added.

The report further states that “if the current trajectory of growth in the scale and interconnection of crypto-assets with these institutions were to continue, it could have implications for global financial stability.”

The report assessed that the market capitalization of crypto assets grew 3.5x in 2021 to reach a value of $2.6 trillion. He said crypto assets continue to remain a minor part of the overall financial system, but equated the risk to exposure to subprime mortgages that triggered the 2007-2008 financial crisis.

“If financial institutions continue to become more involved in crypto-asset markets, it could affect their balance sheets and liquidity in unexpected ways,” the report said.

As in the case of the subprime mortgage crisis in the United States, a small known exposure does not necessarily mean a small amount of risk, especially if there is a lack of transparency and insufficient regulatory coverage, he said. he noted.

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The report reviewed vulnerabilities in three segments of the crypto asset markets, comprising unbacked currencies like bitcoin, stablecoins like tether, which are backed by reserve assets, asset trading platforms currencies and decentralized finance (DeFi). All of these only exist online and are not controlled by a centralized body.

The structure of stablecoins is of particular concern as it exposes consumers to high credit risks as well as operational risks, sudden runs on their reserves and inadequate liquidity.

An unsecured currency also carries the risk of high price volatility. Other concerns include the environmental impact of power-intensive mechanisms used for some crypto assets, public policy issues such as its use for cybercrime, ransomware, and money laundering.

The FSB said it will continue to monitor developments and risks in crypto-asset markets, including with respect to crypto-asset trading platforms, based on the framework released in 2018.