The crypto-asset markets are evolving rapidly and may reach a point where they will represent a huge threat to global financial stability due to their scale and structural vulnerabilities. Also, they pose a threat due to increasing interconnectedness with the traditional financial system, as highlighted in the Financial Stability Board (FSB) in a new report on the industry.
Notably, the report also examines the developments and integrated vulnerabilities that relate to three segments of crypto-asset markets which include crypto asset and decentralized finance (DeFi) trading platforms, stablecoins, and unbacked digital coins such as bitcoin.
This study shows the number of vulnerabilities that are associated with the crypto-asset markets. They include liquidity mismatch, increasing linkages with the regulated financial system, credit and operational risks that make the stablecoins prone to abrupt and disruptive runs within their reserves with a possibility of spilling over to the near-term funding markets.
Others include the growing use of leverage in investing strategies, significant concentration risk of trading platforms; coupled with the opacity and lack of regulatory oversight in the industry. The report also highlights wider public policy worries that are related to the crypto assets, including low levels of investor and consumer understanding, cyber-crime, money laundering, and ransomware.
The FSB warned that financial stability risks might increase quickly and calls for well-timed and pre-emptive evaluation of potential policy responses. It said that the quick evolution and international nature of crypto-asset markets raise the possibility for regulatory gaps, arbitrage, or fragmentation.
In the wake of the growing threat to financial stability, the FSB said that it wants to update previously published guidance on global stablecoin arrangements that will identify how such gaps may be addressed by the existing frameworks.