Today the Financial Stability Board that monitors the global financial system issued a report that says crypto-assets don’t currently pose a threat to stability. However, as with previous announcements they state that vigilant monitoring is needed. The rapid rise in the market at the end of 2017 and subsequent fall is part of the reason for their watchfulness.
The most significant risk is if or when there is large-scale exposure by financial institutions. Given the preparations to support financial institutions by many crypto exchanges and custodians, as well as the growing use of crypto-related financial instruments, the vigilance is warranted.
One of the biggest concerns is how to monitor the risks. In particular the lack of information about the extent of leverage in the market. Additionally, there’s the issue of measuring direct and indirect exposures of financial institutions.
The report lists several potential risks for financial stability. A less obvious one was the “confidence effects and reputational risks for financial institutions and their regulators”.
If crypto-assets become widely used in payments or settlements that could raise issues for financial stability. And there’s the risk of market capitalization and wealth effects. For example, if large swathes of the population invested in crypto-assets and there was a market decline similar to earlier this year.
Outside of stability implications, the FSB also addressed some of the weakness in crypto-assets and related markets. These include the lack of common money features such as a means of payment, a stable store of value, and mainstream unit of account.
The report covered market issues such as poor liquidity, use of leverage, volatility, and operational risks.
Last week the Bank of Canada highlighted the need for a contingency plan should crypto-assets present a threat in the future.
