FSB Warns of Emerging Risks to Financial Stability from Crypto
Posted by Colin Lambert. Last updated: February 17, 2022
The Financial Stability Board (FSB) has published an updated assessment of risks to financial stability from crypto-assets, in which it says the speed of evolution in these markets “could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system”.
The report examines developments and associated vulnerabilities relating to three segments of crypto-asset markets: unbacked crypto-assets (such as Bitcoin); stablecoins; and decentralised finance (DeFi) and crypto-asset trading platforms. It notes the close, complex and constantly evolving interrelationship between these three segments, which need to be considered holistically when assessing related financial stability risks.
The report also 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.
It 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.
FSB observes that financial stability risks could “escalate rapidly” and calls for timely and pre-emptive evaluation of possible policy responses. Currently, it says, crypto-assets remain a small portion of overall global financial system assets and direct connections between crypto-assets and systemically important financial institutions and core financial markets, while growing rapidly, also remain limited. “Nevertheless, the rapid evolution and international nature of crypto-asset markets raise the potential for regulatory gaps, fragmentation or arbitrage,” it warns.
The FSB says it will continue to monitor developments and risks in crypto-asset markets and will explore potential regulatory and supervisory implications of unbacked crypto-assets, including the actions FSB jurisdictions have taken, or plan to take, to address associated financial stability threats. It will also continue to monitor and share information on regulatory and supervisory approaches to ensure effective implementation of its high-level recommendations for the regulation, supervision and oversight of so-called “global stablecoin” arrangements.