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Top policymakers warned on Wednesday that the risks cryptocurrencies pose to global financial stability could "escalate rapidly," calling for immediate action to prevent a crisis in the digital asset market.
Top policymakers warned on Wednesday that the risks cryptocurrencies pose to global financial stability could "escalate rapidly," calling for immediate action to prevent a crisis in the digital asset market.
Given the tightening link between the traditional financial system and the digital asset market, the Financial Stability Board, which provides guidance to the G20 nations on financial regulations, said on Wednesday that legislators must respond swiftly in designing rules covering the digital asset market.
"There is clearly a higher degree of urgency," said Klaas Knot, the Dutch central bank governor who took over as chair of the Basel-based FSB in December, describing how the board had previously been "comfortable" in stating that crypto posed no material risk due to its size and lack of connectivity to traditional financial markets.
"Now what we are seeing is . . . not only has there been a rapid increase in scale, but also, the touchpoints with traditional financial intermediation have increased and therefore it needs more focus from the FSB," he continued.
Bitcoin and ether's market value soared from around $350 billion at the start of 2020 to over $3 trillion last year. Since then, it has dropped to just over $2 trillion.
Because of "significant data gaps," some aspects of the crypto market, as well as its connections to the rest of the financial system, are difficult to assess, according to the FSB.
Global regulators have reacted to crypto with a patchwork of policies, including a harsh crackdown in China and efforts in the United Kingdom to limit crypto advertisements and register crypto businesses for money laundering and counter-terrorism compliance.
The Financial Stability Board is developing international standards for digital assets, which Knot expects to "progress quite a bit in 2022."
"There’s a strong push by all jurisdictions that feel that these risks are rapidly evolving," he said. "If you have a server, you can take it under your arm and put it anywhere in the world and start issuing these assets, right?"
"So this is truly of a global nature, a global business, that does call for a global and a globally harmonised co-ordinated response."
The FSB warned in a report on crypto risks released on Wednesday that the collapse of a large cryptocurrency could have an outsized impact by causing a confidence crisis in other asset classes.
A run on even a single crypto asset, such as a stablecoin — a type of crypto asset that its value is pinned to a fixed currency or basket of currencies — would have "destabilizing effects across the financial sector," according to Knot. He did say, however, that the risk of contagion to other areas of the financial markets had "of course increased" as the crypto market grew in size.
The FSB also warned that large banks and other systemically important financial institutions were becoming "increasingly willing" to get involved in crypto, citing global stablecoins as posing particular risks to financial stability.
"A disorderly run due to a loss in confidence on a [global stablecoin] that has reached significant scale could lead to disruptions in the real economy and spillovers into the broader financial system," the FSB warned.
The Financial Stability Board (FSB) and other authorities are already working on ways to mitigate the risks posed by global stablecoins.
"Regulation is always a reactive business because innovation takes place in the industry," Knot explained. "We will always be in the second coach but I think the distance between the first and the second coach has become much smaller over time. There’s definitely more urgency now."
By fLEXI tEAM