Fast growing and largely unregulated crypto-asset markets may ultimately present a threat to global financial stability, the Financial Stability Board (FSB) says.
In a new report the FSB says that although the extent and nature of use of crypto-assets varies across jurisdictions, financial stability risks could rapidly escalate, highlighting the need for timely and pre-emptive evaluation of possible policy responses.
"Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system," the FSB says.
"Crypto-asset market capitalisation grew by 3.5 times in 2021 to $2.6 trillion, yet crypto-assets remain a small portion of overall global financial system assets. Direct connections between crypto-assets and systemically important financial institutions and core financial markets, while growing rapidly, are limited at the present time."
"Nevertheless, institutional involvement in crypto-asset markets, both as investors and service providers, has grown over the last year, albeit from a low base. 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," says the FSB.
"The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage. 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."
The FSB coordinates the international work of national financial authorities and international standard-setting bodies, developing and promoting the implementation of effective regulatory, supervisory, and other financial sector policies. Based in Basel, Switzerland, it's hosted by the central banks' bank, the Bank for International Settlements.
FMA doesn't regulate cryptocurrencies
In a submission to a parliamentary select committee's inquiry into cryptocurrencies last year, New Zealand's Financial Markets Authority (FMA) pointed out it doesn't regulate cryptocurrencies. However, some cryptocurrency activities can fall within the FMA's regulatory remit.
The FMA says it only regulates cryptocurrency issuers or service providers, such as exchanges, to the extent they are issuing cryptocurrencies that are financial products, or if they are in the business of providing a financial service.
"As a general observation, most offers of cryptocurrencies and most cryptocurrency exchanges deliberately structure themselves to operate outside of the reach of mainstream markets or securities regulation," the FMA says.
"There has not been a regulated offer of cryptocurrencies yet in New Zealand nor is there a regulated financial product market here. We have however seen a number of offers made in other jurisdictions that may have been taken up by people in New Zealand. The regulatory protections available in such circumstances are very minimal," the FMA says.
DeFi concerns
Meanwhile, the FSB notes decentralised finance, or DeFi, is a fast-emerging sector, providing financial services using both unbacked crypto-assets and stablecoins. Additionally some crypto-asset trading platforms aggregate multiple types of services and activities, including lending and custody.
"Some of these platforms operate outside of a jurisdiction’s regulatory perimeter or are not in compliance with applicable laws and regulations. This presents the potential for concentration of risks, and underscores the lack of transparency on their activities."
The FSB says that, partly due to the emergence of DeFi, stablecoin growth continues, despite concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance.
"At present, stablecoins are used mainly as a bridge between traditional fiat currencies and crypto-assets, which has implications for the stability and functioning of crypto-asset markets. 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."
"Without sufficient regulation and market oversight, DeFi and associated platforms, might present risks to financial stability. Some of these risks are becoming apparent, such as concentration risk in terms of protocols and technology used. The sector has already seen numerous operational and cybersecurity incidents, and failures of governance. DeFi related hacks made up over 75% of the $481 million known total hack and theft volume of crypto-assets through September 2021."
FSB to 'monitor and share information on regulatory and supervisory approaches'
The FSB also highlights a number of vulnerabilities associated with crypto-asset markets, including increasing linkages between crypto-asset markets and the regulated financial system; liquidity mismatch, credit and operational risks that make stablecoins susceptible to sudden and disruptive runs on their reserves, with the potential to spill over to short term funding markets; the increased use of leverage in investment strategies; concentration risk of trading platforms; and the opacity and lack of regulatory oversight of the sector.
And it sees wider public policy concerns related to crypto-assets. These include low levels of investor and consumer understanding of crypto-assets including costs, fees, conflicts of interest and lack of redress and/or recovery and resolution mechanisms, money laundering, cyber-crime and ransomware, and uncertainties around the operational resilience of some crypto-asset focused institutions.
The FSB argues that, if current trends continue, and there's no effective regulation and supervision, financial stability risks may emerge as crypto-assets become increasingly interconnected with the wider financial system.
"This is especially the case in emerging market and developing economies where crypto-assets may in some situations replace the domestic currency, or offer opportunities to circumvent exchange restrictions, and capital account management measures," says the FSB.
"The FSB will continue to monitor developments and risks in crypto-asset markets. It will explore potential regulatory and supervisory implications of unbacked crypto-assets, including the actions FSB jurisdictions have taken, or plan to take, to address associated financial stability threats. The FSB will also continue to monitor and share information on regulatory and supervisory approaches to ensure effective implementation of its high-level recommendations for the regulation, supervision and oversight of so-called 'global stablecoin' arrangements," the FSB says.
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56 Comments
The issue I have with the "evil" Central Bank view is that it seems to rely on the notion that once there is competition and/or the government is out of the picture, the good guys will race in to give the "people" freedom of choice, privacy and control of their money & transactions. The problem is that the world will still be loaded with "people" who are not Central Bankers, or "the Government" but are still grifters, con artists, scammers & swindlers who are out to get rich(er) at someone else's expense. The only thing that will change is the names. Instead of Jerome Powell or Adrian Orr we'll have Kim Kardashian, Tom Brady & Floyd Mayweather Jr. The former, of which, have degrees in finance or economics. The latter, of which, know how to throw a football or a punch or have a big booty and a lot of Instagram followers.
Greed and the behaviour it drives is not exclusive to a central bank, the government, or a secret society somewhere. It is not tied to fiat or cryptocurrency. It's tied to human nature. The problem is not that we have a growing number of people without enough, it's that we have a growing number of people who won't recognize that they have enough.
Good thing investors were protected from these risky assets..
https://twitter.com/cobie/status/1494031114436030474?s=20&t=5GDd0sDVhFG…
Good choice to name the FSB after the Russian secret service!!
Personally I have always thought crypto is a scam, and have been amazed at how many people will throw money at an unbacked asset. It's hugely popular now though and the only place you could regulate it is at the point where the exchange between crypto and fiat takes place.
Specious Blobbles. Built around half truths.
The question of what backs fiat currencies is a very complex one in today's world without the gold standard.
Parts of that support includes the resources available in the country or region where it is used, the accessibility and use of those resources, the quality and stability of governance over the country and hence the stability of the currency, the external perception of that country, and the overall demand for that currency.
As our currency as are most, is floating then just like shares, there will be an emotional quotient too.
You may be suprised to find out what's backing that fiat.
The trust and naivety of the sheeple. That's why they don't understand why the property bubble keeps humming along while their real wages have been increasing at a much lower growth trajectory for the past 30 years. They don't realize that the credit lent into existence is essentially adding to the money supply based on the backs of them sacrificing their time in ever-increasing proportions.
It works until it doesn't.
This is where you have to differentiate between Bitcoin and "Crypto".
Even Charlie Munger thinks fiat currency are going to zero in the future!
https://twitter.com/APompliano/status/1494045341716557827?s=20&t=xjFdeu…
Well where does that leave Bitcoin ? You know that Bitcoin is tied to the "Value" of the USD right ? if Fiat goes to zero then so does Bitcoin. I guess you could go with the hope that 1 Bitcoin eventually hits $1 Trillion USD because its essentially worthless anyway. By then the central banks would have moved to a CBDC and cut the links to Bitcoin, thereby forcing it to stand on its own two feet and face price discovery as a medium of exchange. Sounds like a possible poop in your pants moment to me.
1BTC = 1BTC, that is the whole point. It will be the unit of account.
And Bitcoin is in price discovery every second of every day, its called an open global market. It will continue to do this until it finds its true value, which will take a few decades yet, hence the volatility.
Sorry you cannot fob the volatility off on price discovery, that's a total cop out. If Bitcoin had true value then the only way would be up. Bitcoin would be going up much faster than Fiat is going down over time and that's obviously not the case. Bitcoin is going up and down like a yo-yo because its the worlds best ever created Ponzi. Countries have a reason to be concerned because if it pulls in enough speculators and sucks in enough Fiat then crashes to zero, its a total wipe out, you may of well of just put a few trillion in a big heap and set fire to it.
Bitcoin would be going up much faster than Fiat is going down over time and that's obviously not the case.
But bitcoin is going up much faster than fiat is going down.
Its averaged 93.8% over the last 5 years compared to fiats long term average of ~2% drop a year.
Crypto is pretty well-regulated at the point of cashing out at the bank- the usual know your customer routine applies. Long ago there were other options for cashing out but they've been shut down so the only route left is banks. I am curious about the statement about cypto being an unbacked asset, since our entire financial system is based on fiat- it is all unbacked asset, ie. fractional reserve banking. Crypto withdrawl limits are in place and it is taxed. Like anything, there are probably holes in the fence for those willing to take the risk to wiggle through, but probably no more or less than anything else. Things will inevitably tighten up more over time and it will likely end up like everything else. Unless there is some angle of advantage for people who influence such things.
Fiat is backed by law, which means that the minimum wage has to be paid in NZD, taxes, rego, fines, debts and heaps of other stuff. It's legal tender which means you can demand settlement in Fiat. However ineffectively, there is even a central bank that is responsible for the stability of Fiat. Fiat doesn't have one single underlying asset backing it, it has an entire economy backing it where you can exchange your fiat for anything. None of that applies to crypto.
https://twitter.com/nayibbukele/status/1494066643625988107?s=20&t=xjFde…
How El Salvador responds to this sort of BIS-shit
Of course Bitcoin is a risk to the current financial system, the whole entire purpose is to have a system that is not controlled by humans.
What is happening in Canada currently is the perfect example of why we need it:
https://twitter.com/nayibbukele/status/1493377382245441537?s=20&t=xjFde…
https://twitter.com/JamesMelville/status/1494092820260532227?s=20&t=xjF… (all of Canadas major banks are currently offline)
That's one of the problems though. Much of the crypto space is out of control and heading for an almighty crash. Personally, I think that's quite natural and necessary. Kind of how capitalism should work.
The last thing we need is bureaucrats telling us what's right, wrong, and what is of value. First, most of them don't understand crypto (philosophically, economically, and technically) and its related technologies (which could be a range of different things related to defi, Web3, etc). Second, they have too much vested interest in the status quo and executive power over the sheeple.
I am not an ultra orthodox and I listen seriously to all the critics of crypto, even though they're repetitive. However, you need to understand the motivations of those critics. They feel threatened to a large degree.
Agree with you wholeheartedly.
I've been dabbling in crypto for the best part of 10 years now (and like anyone with a track record in crypto but no crystal ball, I could have had a fortune ... but that is besides the point). I still have a modest interest, and buy in a little each month just to keep my hand in the game.
My interest originally - and still is - in the decentralisation of money/finance and allowing people to transact outside of the purview of the government. In some respects, crypto has disappointed massively here as it has instead turned into a digital Las Vegas on steroids, and high transaction fees and slow transaction times on bigger networks/cryptos make it fairly useless as currency.
I agree that crypto is out of control and heading for a crash as well. The biggest indicator of this to me is the NFT craze. I follow boxing closely, and every boxer - both current and washed up - is now pedalling their own range of NFTs.
When Tyson Fury, a man whose greatest talent is the ability to take punches like water off a duck's back, is flogging an exclusive NFT collection on Instagram, it's probably time to start motioning towards the exits.
However, the "pure" nature of the crypto market is refreshing. You can win big, you can lose big, and there isn't much in the way of a safety net. That's the way it should be. Because in the 'real world' the safety net is only ever offered to the establishment players, while the little guy gets screwed.
When Tyson Fury, a man whose greatest talent is the ability to take punches like water off a duck's back, is flogging an exclusive NFT collection on Instagram, it's probably time to start motioning towards the exits.
Hang on, are you saying we shouldn't be taking financial advice from someone who gets hit in the head professionally?
Personally, I think that's quite natural and necessary. Kind of how capitalism should work.
The last thing we need is bureaucrats telling us what's right, wrong, and what is of value.
Crypto is quite good in that regard, an actual free market. Housing should be a lot more like that, free to fall in hard times rather than being a govt welfare scheme for the wealthy.
The governments all over the world as technology advances will be able to hack crypto and manipulate it the prize one will be Bitcoin I would imagine they could already do this. if it really can’t be hack they will make illegal to own just like US did with gold. Who really know the governments could be behind the creation of it.
The governments all over the world as technology advances will be able to hack crypto and manipulate it the prize one will be Bitcoin I would imagine they could already do this
Oh dear. You should do some reading before you post things like this. "Theoretically" it is possible to "hack" the Bitcoin protocol. In reality, it is not.
An exchange getting hacked is not the same thing as the blockchain or wallets themselves being hacked.
A 256 bit keyspace contains about the same number of keys as there are atoms in the entire universe. That's what you are dealing with when trying to crack SHA-256: https://en.wikipedia.org/wiki/SHA-2
If a quantum algorithm was found to break SHA-256 in a practical amount of time (there is none known), then the blockchain would simply be forked from a certain point in time with a new quantum resistant algorithm in place.
If SHA-256 is somehow cracked, the ENTIRE WORLD is broken, bitcoin really would be the least of anybody's concern.
It pays to understand this stuff because it's the future.
The blockchain will never be "hacked" and have all the value of the coins go to zero.
So there’s a chance.going back they said we can’t fly going out of orbit was just things for crazy people cloning animals impossible splitting the atom no chance you can’t be serious saying the blockchain can’t be hacked maybe it will be as easy a turning on tv in 10 years.
There's always a chance. You could try guessing a SHA-256 key in order to break into one bitcoin wallet.
You have a 1 in 115 quattuorvigintillion 792 trevigintillion 89 duovigintillion 237 unvigintillion 316 vigintillion 195 novemdecillion 423 octodecillion 570 septendecillion 985 sexdecillion 8 quindecillion 687 quattuordecillion 907 tredecillion 853 duodecillion 269 undecillion 984 decillion 665 nonillion 640 octillion 564 septillion 39 sextillion 457 quintillion 584 quadrillion 7 trillion 913 billion 129 million 639 thousand 936 chance of getting it right.
If you somehow build a network of computers to try it a million, billion, trillion or quintillion times a second you will still get nowhere for as long as the universe exists. It would be much more profitable to mine the bitcoin.
If somebody builds a working quantum computer in the future, SHA-256 is resistant to all known quantum algorithms.
The whole point of this movement is separation of monetary and state affairs by building an entirely independent financial system. States have historically derived a great deal of power from their ability to collect taxation and issue currency. Soon that will likely end - for better or worse.
I cannot see this as being at all true, or any worse than the housing crisis.
The only way this could be true is where people or institutions have accepted crypto as a security against some purchase and the 'value' of the crypto crashes. Otherwise it's just that a bunch of people have spent a lot of fiat money buying a theoretical money item, the demand being the cause of a price rise. If that demand suddenly dries up and the value crashes does it really matter? Some people may end up bankrupt, but then if they've been supported by banks into buying crypto, then surely it is the banks practices which are questionable? This is not really any different to people borrowing to buy shares. If a bank collapses because of those practices Governments should learn a lesson from other events and bail out the depositors not the bank itself.
There's one glaring systempunkt in all of the 'alt' coins: total dependence on Interwebs.
Submarine cables- snip
Satellites- blown out of orbit or lasered into scrap
If I were a Putin or a Xi, I'd be planning a leetle mayhem along these lines, following Randy Newman's advice a half century ago in 'Political Science' - "let's drop the Big One and see what happens"......but updated....
The whole world is dependant on the interwebs ... if they did that it wouldnt be bitcoin people would be concerned about, nothing would work.
All your high street banks and payments to and from them would be down, hospital booking and inventory systems, all the computers for flight comms, none of your supermarket stock systems would work, ordering and tracking of fuel across the country would be down, something like that would be fixed in days or weeks at most and made twice as robust so it didnt bring a country to its knees again - bitcoins importance of what wasnt working would be a long way down on that list
The dependency is very recent. I've worked in IT since the mid 70's and have seen inside a very few of the systems you quote. All, without exception, were until the last few years, built on in-house hardware ranging from big iron mainframes to minis to glorified PC's. Comms were over local copper, sneakernet, or private Fibre (e.g. Transpower SCADA).
It would be relatively easy to go back to that: indeed, many of the big institutions never left it. They simply pasted webservices across front ends and UI's and soldiered on.
Local interwebs also work, the Great Firewall of China is the poster child here. Good luck with calling a defi API from inside That.....
The point, and the exquisite vulnerability, remains....
Point taken. cypto has a fatal vulnerability. But so do the other financial entities. Speed trading relies on server farms as well. Also, why is there always an assumption that Russians or the Chinese are interested in creating mayhem? As if only 'they' would ever consider such actions, never 'us'. And the irresponsible nations provoking war all the time happen to be US/UK, at least they are the most vocal.
FSB sponsored by the IMF & BIS ? @Gareth what does "global financial stability" mean? Is it support of the USD, is it supporting the US exporting their inflation with manipulated oil prices, is it supporting US control?
Further on someone who commented crypto as a scam - What if your government tries to stop access to your money in your bank account because you disagree with something? I don't necessarily agree with the mandate protests but observe what is going on in Canada now - think about China's crappy stable Yuan coin - where the CCP can stop your access to your money if you don't tow the party line.
Bitcoin is volatile, it has risk with you setting up & managing your own wallet (think bank account) ---> buyer beware. It has been going for 12 year; and in every year but last (late 2021) holding bitcoin will have been a positive return well and truly beating inflation rates.
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