Crypto Is a “Threat to Global Financial Stability,” Top Regulator Warns

The Financial Stability Board has issued a report claiming that crypto assets could pose a threat to financial stability worldwide.

Financial Stability Board Raises Alarm on Crypto

The Financial Stability Board is the latest regulator to issue a warning on cryptocurrencies.

In a report published Wednesday, the financial body identified “vulnerabilities” in emerging crypto markets that it said raise the risk of financial instability worldwide. It studied vulnerabilities within three segments: “unbacked” assets such as Bitcoin, stablecoins, and DeFi platforms and other crypto trading venues. It pointed to the rapid growth of areas like DeFi and noted that the global cryptocurrency market cap rose to $2.6 trillion in 2021 (the market cap for the asset class in fact topped $3 trillion and is now closer to $2 trillion today). If this growth continues, the Financial Stability Board said, it “could have implications for global financial stability.”

The report highlighted the increasing connectedness between crypto and traditional financial system and called attention to stablecoins, noting that dollar-pegged assets like USDT and USDC has grown “despite concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance.” It also warned that a stablecoin failure could have a negative impact across DeFi. An excerpt read:

“Were a major stablecoin to fail, it is possible that liquidity within the broader crypto-asset ecosystem (including in DeFi) could become constrained, disrupting trading and potentially causing stress in those markets. This could also spill over to short-term funding markets if stablecoin reserve holdings were liquidated in a disorderly fashion.”

Other vulnerabilities the regulator mentioned included “opacity and lack of regulatory oversight” in the crypto sector, “money laundering, cyber-crime and ransomware” cases involving crypto assets, and the risks associated with unbacked assets. The report concluded by noting that the Financial Stability Board would “continue to monitor developments and risks in crypto-asset markets, including with respect to crypto-asset trading platforms.”

The Financial Stability Board was created by G20, a global forum made of 19 of the world’s biggest economies and the European Union. It was established a year after the 2008 financial crisis to keep an eye on threats facing the global economy. Today’s report is a revised overview of its 2018 assessment presented to G20 countries in which it said that crypto did not present material risk to global financial stability. However, that stance changed in span of few years. In 2020, it published recommendations on global stablecoins, one of which was advising central banks to ban them.