The Financial Stability Board (FSB) has warned that in the future, crypto-asset markets could disrupt the security of financial markets. The organization plans to closely monitor the development.
Today, in an update to their previous commentary and reporting on crypto-asset markets, the Financial Stability Board (FSB) released a report titled, “Crypto-asset markets: Potential Channels for Future Financial Stability Implications.”
The FSB describes itself as:
“[…] an international body that monitors and makes recommendations about the global financial system.”
The organization prefers to use the term “crypto-assets” instead of “cryptocurrencies,” as they believe current cryptocurrencies do not effectively function as money — they are too volatile and unreliable as a store of value.
Key Areas of Concern
The FSB expressed concerns over broader issues like consumer and investor protections, regulations, market integrity, and fraud. The organization feels that a close eye should be kept on crypto-asset price volatility.
On January 8th 2018, the combined market capitalization of crypto-assets peaked at an estimated $830 billion — of which approximately 35% was attributable to Bitcoin. This later dropped to just above $210 billion as of 4 October 2018.
As most regulatory and government-backed organizations like to do, the FSB also focused on the possibility of crypto-assets to provide a pathway for those looking to commit fraud, finance illicit activities, and evade sanctions and taxes.
The report further warns that these “[…] problems 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.”
Crypto-Asset Market Instability
In the event of widespread cryptocurrency adoption and use, the FSB outlined four crucial areas as potential points of risk that if left unaddressed could lead to financial instability within crypto and traditional markets.
The report noted that market liquidity would remain a risk as long as “ownership of crypto-assets” remained “concentrated among relatively few market participants.”
From their point of view, this lack of spread in cryptocurrency ownership limits liquidity, market depth, and the ability for the overall market to sustain larger trading volumes. Illiquidity and the potential for manipulation on unregulated exchanges were also mentioned as persistent threats.
Too Much Volatility
Volatility and leveraging risks also made the list. One statistic highlighted in the report noted, “[…] the price volatility of the top two crypto-assets by market capitalization was between six and thirteen times higher than that of the euro, gold and the S&P 500 as of 4 October 2018.” The FSB believes if the issue of volatility is not resolved, investors and those wishing to use cryptocurrency as money will encounter significant difficulty using them for “payments or settlement.”
The FSB also called for more meaningful regulation of crypto-assets. One survey estimated that “nearly 20% of crypto-asset owners used debt to finance purchases,” and trading on margin is readily available to novice investors on a range of crypto-asset exchanges.
Technological and operational risks formed the fourth area of focus. This category drew sharp criticism regarding the lack of governance, regulation and security protocols that would prevent exchange hacks and capital loss for investors.
Fortunately, There’s a Light at the End of the Tunnel
While the report provided a clear, bird’s-eye view of all the problems currently plaguing the cryptocurrency market, the FBS believes that for the time being, the “risks to global financial stability are not significant at present, given the limited size of crypto-asset markets relative to other financial markets”
The report also seemed to suggest that in the event of a total market implosion, traditional markets would be shielded from shrapnel as “the limited interconnectedness between crypto-asset markets and the regulated financial system.”
The FBS report concluded by acknowledging that there are many benefits to distributed ledger technology (DLT). They also remarked that crypto-assets could possibly function as money in the future, but comprehensive regulatory frameworks and investor protections will need to be put in place.
Do you agree with the FSB’s crypto-asset market analysis? Share your thoughts in the comments below!
Images courtesy of Shutterstock.