Crypto-asset markets are fast evolving and 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, states the Financial Stability Board in a new report on the sector.
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.
The study highlights a number of vulnerabilities associated with crypto-asset markets. These include increasing linkages with 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, money laundering, cyber-crime and ransomware.
The FSB warns that financial stability risks could escalate rapidly and calls for timely and pre-emptive evaluation of possible policy responses. It states that the rapid evolution and international nature of crypto-asset markets raise the potential for regulatory gaps, fragmentation or arbitrage.
In light of the growing threat to financial stability, the FSB says it intends to update previously published guidance on global stablecoin arrangements which will identify how any gaps could be addressed by existing frameworks.