Crypto assets are quickly evolving, and their scale could reach a point where they would pose a great risk to global financial stability, the Financial Stability Board (FSB) said on Wednesday (Feb. 16).
The FSB said that cryptocurrency assets could cause structural vulnerabilities and “increasing interconnectedness with the traditional financial system.” The global regulators released an updated report on Wednesday outlining the financial stability risks from crypto assets.
FSB regulators — European Central Bank, Bank of England and Federal Reserve —note in the report that the threat “could escalate rapidly and calls for timely and pre-emptive evaluation of possible policy responses.”
See also: Global Regulator Mulls Cryptocurrency Framework
Crypto assets, right now, are just a small player in overall global financial system assets, according to the FSB. Crypto assets also play a minor role in having “direct connections with systemically important financial institutions and core financial markets.”
It’s how quickly they evolve and multiply that concerns the FSB. Further, crypto assets have reach across numerous international markets, which could cause issues like “regulatory gaps, fragmentation or arbitrage.”
“The report highlights a number of vulnerabilities associated with crypto-asset markets. These include increasing linkages between crypto-asset markets and the regulated financial system; liquidity mismatch, credit and operational risks that make stablecoins susceptible to sudden and disruptive runs on their reserves, with the potential to spill over to short-term funding markets; the 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 wider public policy concerns related to crypto-assets, such as low levels of investor and consumer understanding of crypto-assets, money laundering, cyber-crime and ransomware.”
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