BASEL, Switzerland–The Financial Stability Board (FSB) has issued a new warning that crypto-based financial assets pose a threat to the security of financial markets.
In a new report, “Crypto-asset markets: Potential Channels for Future Financial Stability Implications,” the FSB, which uses the term “crypto-assets” rather than the more common “cryptocurrencies,” said it does not believe crypto-assets effectively function as money and are too volatile and unreliable as a store of value.
The report follows up on the initial assessment set out in the FSB Chair’s March 2018 letter to G20 Finance Ministers and Central Bank Governors, and the summary of the work of the FSB and standard-setting bodies on crypto-assets the FSB published in July
The FSB noted, for instance, that on Jan. 8, 2018, the combined market capitalization of crypto-assets peaked at an estimated $830 billion, a figure that had plunged to approximately $201 billion by Oct. 4. Most of that decline could be attributed to Bitcoin’s plunge.
Assessment of Primary Risks
The report includes an assessment of the primary risks present in crypto-assets and their markets, such as low liquidity, the use of leverage, market risks from volatility, and operational risks. Based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account.
In addition to concerns over the volatility of such crypto-assets, the FSB said it also has concerns over issues that include consumer and investor protections, regulations, market integrity, and fraud.
With the latter, the FSB said crypto-assets are especially vulnerable to being used for financing illicit activities and evading sanctions and taxes.
“(P)roblems are exacerbated when crypto-assets are not backed by an accountable entity that can be bound by regulation and held responsible for potential breaches of regulation,” the new report states.
Should crypto-assets or cryptocurrencies reach widespread adoption, the FSB said there are four crucial areas related to risk that must be addressed in order to avoid instability.
Other Negative Implications
Additional future negative implications may also include confidence effects and reputational risks to financial institutions and their regulators; risks arising from direct or indirect exposures of financial institutions; risks arising if crypto-assets became widely used in payments and settlement; and risks from market capitalization and wealth effects, according to the report.
In addition, the FSB warned that market liquidity would remain a risk as long as “ownership of crypto-assets” remained “concentrated among relatively few market participants.”
The FSB did offer some reassurance, however, saying current problems within the crypto-asset market do not pose a risk to global financial stability. In addition, the FSB said there are also numerous benefits to be had from adoption of distributed ledger technology, also known as blockchain.