- While cryptocurrencies remain a small and somewhat niche portion of the universe of investable assets, its rapid growth has led to the FSB warning that their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system could soon threaten global financial stability.
- Given the significant role that retail investors play in the cryptocurrency sector, their rapid evolution and cross-border nature has made regulating the nascent asset class a headache for regulators.
With a global (and somewhat speculative) market cap of US$2 trillion, could cryptocurrencies really ever be considered too big to fail?
Given that on any given day, anywhere between US$6 trillion to US$8 trillion of derivatives are traded, cryptocurrencies are a drop in the ocean in the financial world.
But that hasn’t stopped the Financial Stability Board (FSB), which is comprised of regulators including the European Central Bank, the U.S. Federal Reserve and the Bank of England, from warning of the potential fallout from machinations within the cryptocurrency markets.
While cryptocurrencies remain a small and somewhat niche portion of the universe of investable assets, its rapid growth has led to the FSB warning that their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system could soon threaten global financial stability.
In a report released yesterday, the FSB cited the use of leverage, technological fragilities and liquidity shortages to be key areas of concern, especially given the low levels of investor and consumer understanding of cryptocurrencies.
Money laundering, cybercrime and ransomware were also given as some of the nefarious uses for cryptocurrencies that global regulators should pay more attention to.
Given the significant role that retail investors play in the cryptocurrency sector, their rapid evolution and cross-border nature has made regulating the nascent asset class a headache for regulators.
The FSB has recommended that regulators consider “timely and preemptive evaluation of possible policy responses” including prioritizing cross-border and cross-sectoral cooperation, including information sharing between regulatory bodies, to keep up with the rapid pace of evolution in the sector.
The Biden administration has made cryptocurrency regulation one of its key pillars and the U.S. Securities and Exchange Commission has proved far more proactive in its approach to cryptocurrencies, with a bent towards carving out a wider ambit for its jurisdiction.
But short of more comprehensive legislation, cryptocurrencies will continue to straddle multiple agencies and interest groups in government, inevitably leading to turf war and a lack of regulatory certainty with which companies that want to operate within the law have to struggle to navigate.
That cryptocurrencies are increasingly going mainstream is reflected in the FSB’s most recent report, which contrasts with a 2018 report that declared at the time cryptocurrencies did not “pose a material risk to global financial stability.”
