Crypto market could threaten financial stability, FSB says

The rapid growth of crypt-asset markets could threaten global financial stability, the Financial Stability Board said. FSB cited the markets’ scale, increasing interconnectedness with the traditional financial system, and structural vulnerabilities in its assessment. 

The Feb. 16 report examined the developments and associated vulnerabilities relating to unbacked crypto-assets such as Bitcoin, stablecoins, decentralized finance and crypto-asset trading platforms. The report comes as the digital currency market continues to grow: the market capitalization of all cryptocurrencies reached a record $2.6 trillion last year. 

According to the report, there are a number of vulnerabilities with crypto-asset markets, including the links between those unregulated markets and the regulated financial system; liquidity mismatches and credit and operational risks that make stablecoins prone to sudden and troublesome runs on their reserves, potentially spilling over to short-term funding markets; the increased use of leverage in investment strategies; concentration risk of trading platforms; and the lack of regulatory oversight and transparency in oversight of the sector. 

“The report also notes wider public policy concerns related to crypto-assets, such as low levels of investor and consumer understanding of crypto-assets, money laundering, cyber-crime and ransomware,” the FSB stated.  

An international body, the Financial Stability Board includes all G20 major economies, the Financial Stability Forum and the European Commission.