How could digital currencies threaten global financial stability?
Bitcoin, Ether and other digital currencies are no longer considered niche markets in global finance. In a report last week, the Financial Stability Board, an international body of officials from 24 major economies, said the “rapid development” of the digital currency market could quickly reach a point where it becomes a “threat to global financial stability”.
Digital currencies play an important role in global finance
This is due to the growing size, structural defects and relevance of digital currency to the traditional financial system. “Financial stability risks can quickly increase,” this group assessed, asserting that policymakers need to step in.
The FSB’s assessment comes as large banks and companies increase their participation in the cryptocurrency market due to customer demand, despite volatility.
On February 17, the Bitcoin price dropped by nearly 8% when the entire digital currency market sold off. That day, Sequoia Capital was also accelerating the cryptocurrency segment with a new fund of 500-600 million USD. The venture capital giant said it “will only focus on high-liquidity tokens and digital assets”.
“Systemically important banks and other financial institutions are increasingly poised to operate in the crypto space and grow in the industry,” the FSB said. In particular, “It is not excluded that the current growth trajectory and correlation between digital assets and these institutions continue to linger. And this will have an impact on global financial stability. ”
Strong global network of digital currencies
Last year, digital currency market capitalization tripled to $2.6 trillion. However, this number is still relatively small. The global stock market currently has a total size of more than 120,000 billion USD.
So why is the FSB sounding the alarm? The group explains that when big players enter the market, large volatility in the digital currency market can trigger a series of unexpected events. The FSB compares this to developments in the US housing market in 2008, which triggered the global financial crisis.
“As was the case with the subprime crisis in the US. Low participation does not mean low risk, especially when transparency and regulatory systems are inadequate,” the FSB said.
Despite a slow start, upcoming governments could be more aggressive. Yahoo News last week reported that US President Joe Biden is likely to issue an executive order this week. In it, the content involves guiding government agencies to research and develop digital asset management strategies. Earlier this month, the US Congress also heard about regulation of stablecoins (digital assets whose value is pegged to currencies or commodities).
However, UBS does not believe that investors should wait for guidance from the authorities. “It can take a long time for the authorities to get the policies approved by Congress. In the meantime, they will have to deal with matters within their current extremely limited powers,” UBS’s report said last week.
