Why crypto assets market pose risk to global financial stability?

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 Why crypto assets market pose risk to global financial stability?
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Highlights

  • A recent report by the Financial Stability Board (FSB) has highlighted the three segments that pose serious number of risks for the crypto-asset markets: unbacked crypto-assets, stablecoins and decentralised finance.
  • The crypto-assets market cap has grown 3.5 times in 2021 and was estimated to be a US$2.6-trillion market.

In the last decade, the cryptocurrencies have grown at an exponential pace. Today, in fact, cryptocurrencies are challenging the very basis of the traditional form of payment system, even threatening to replace them as the preferred mode of payment. The perfect example of it would be El Salvador’s adoption of Bitcoin as the legal tender, which seems to be charting ways for other nations.

Having said, the rise in crypto assets does open areas that often threaten the very foundation of financial security. In a well elaborated report released Financial Stability Board (FSB) focusses on the three segments that pose a serious number of risks for the crypto-asset markets: unbacked crypto-assets, stablecoins and decentralised finance. It added that crypto trading platforms to pose a significant amount of risk that can destabilise the global economy at present. 

Swiss-based FSB monitors financial authorities in 24 countries and is primarily concerned with the structural and scalability issues related to crypto markets. It further adds it could perhaps cause significant disturbance to the global economy.

Crypto assets market

In the last one year, the crypto assets market cap has grown 3.5 times and is currently a US$2.6-trillion market. While the numbers may sound mindboggling, crypto assets are only a small portion of the overall global financial system.

According to the Swiss-based organisation, as the financial institutions gaining exposure to crypto assets in present times, it also makes it vulnerable in terms of global financial stability. The report explained with the financial institutions' continuous involvement in the crypto assets, it could severely affect the liquidity issues and balance sheets in unexpected ways.

As none of them are regulated by a centralised body, the report feels that it opens up the investors to vulnerabilities in investment. FSB highlights that single stablecoins, which also has been the moot point for SEC, may open the consumers to high price volatility and scams.

In October last year, the FSB had suggested that the stablecoin market is too small to be considered as a mode of payment system for the future. However, the new report suggests that the immense growth of DeFi and the stablecoins can be riskier for the investors than benefits.

Conclusion

Currently, we come across many issues related to scams, cybercrime and the FSB report clearly highlights how the assets are volatile or risky for anyone.

Therefore, it is critical to counter these risks so that it doesn’t bring the financial ecosystem along with it. The FSB report indicates that the potential threat would need constant monitoring to keep pace with the crypto-asset developments.  

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