The Financial Stability Board has said that the crisis in the crypto markets could spill over into the traditional financial system.
Cryptocurrencies threaten financial stability
In a report, the board noted that crypto assets could pose a threat to global financial stability.
The Financial Stability Board is the latest regulator to issue a warning on cryptocurrencies.
In the report, the regulator identified vulnerabilities in emerging crypto markets that it wrote are increasing risk to global financial stability. It examined vulnerabilities in three segments: “Unsecured assets such as Bitcoin, stablecoins and DeFi platforms and other crypto trading venues. Noting the rapid growth of areas like DeFi, it noted that the global cryptocurrency market cap has risen to $2.6 trillion in 2021. Should this growth continue, the Board said, it could have implications for global financial stability.
The report highlighted the increasing connection between cryptocurrencies and the traditional financial system. Most notably, there was talk of stablecoins, noting that dollar-pegged assets such as USDT and USDC were performing well despite concerns about regulatory compliance, the quality and adequacy of foreign exchange reserves and standards of risk management and governance. Furthermore, it was warned that a stablecoin failure could have a negative impact on DeFi.
“Should a major stablecoin fail, it is possible that liquidity will be constrained within the broader crypto-asset ecosystem (including in DeFi), disrupting trading and potentially causing stress in those markets. This could also spill over into short-term funding markets if stablecoin reserves were liquidated in a disorderly manner.”
Other vulnerabilities that the regulator mentioned were opacity and lack of oversight in the crypto sector, money laundering, cybercrime and ranswomware cases involving crypto assets, and the risks associated with secured assets. It was also mentioned that the Financial Stability Board will continue to monitor developments and risks in the markets.
The Financial Stability Board was established by the G20 a year after the 2008 financial crisis to oversee threats to the global economy. In 2018, the Board said cryptocurrencies do not pose a material risk to global financial stability. In 2020, the regulator released recommendations on global stablecoins, which it advised central banks to ban.
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