Why Crypto Could Trigger Market Instability If Left Unchecked

1 min read

An international monetary watchdog group says that crypto markets could disrupt the world’s economy if left unchecked.

In a new report, the Financial Stability Board (FSB) says that the staggering rate at which digital assets are being adopted by blue-chip investors could pose a risk for global financial stability.

“Systemically important banks and other financial institutions are increasingly willing to undertake activities in, and gain exposure to, crypto assets. The prevalence of more complex investment strategies, including through derivatives and other leveraged products that reference crypto assets, also has increased.

If the current trajectory of growth in scale and interconnectedness of crypto assets to these institutions were to continue, this could have implications for global financial stability…

If financial institutions continue to become more involved in crypto-asset markets, this could affect their balance sheets and liquidity in unexpected ways.”

The FSB, which works in conjunction with authorities and other advisory agencies to develop effective market regulations, notes that institutional investors increasing their exposure to crypto assets using leverage could magnify the negative effects if they incur losses.

“Risks could increase further if such exposures employ high levels of leverage, including through the use of derivatives reference crypto assets…

Losses in crypto assets, where accompanied by leverage, liquidity mismatch, and interconnections with the traditional finance system may amplify systematic risk arising from wealth effects.”

The FSB also finds that international regulations and cross-country cooperation could prevent financial instability from spiraling out of control.

“Although the extent and nature of use of crypto assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses…

Given the international and diverse nature of the crypto-asset markets, authorities globally [should] prioritize cross-border and cross-sectoral cooperation.”

Originally Published Here

Via this site