The Financial Stability Board, an advisory board to the G20 organization, just published a report highlighting the implications of cryptocurrencies.
Researchers concluded that cryptocurrencies should be monitored and may pose a threat to global financial stability.
Nevertheless, the risk from cryptocurrencies is not currently seen as significant because of the limited size of the market. As the market continues to grow, the risks of cryptocurrencies may become more significant.
The report is a step up from an earlier FSB report released back in July, when the FSB concluded that cryptocurrencies posed a limited threat to global financial stability. The FSB did not recommend vigilant monitoring in that report. Now, the FSB has changed its tone and is advocating G20 countries to take up “vigilant monitoring” against the crypto industry.
The Financial Stability Board (FSB) reached its conclusions based on a “monitoring framework”. That framework was developed “predominantly based on public data.”
The FSB Identified 7 Specific Risks with Cryptocurrencies
The FSB report identified seven problems with cryptocurrencies, including risks that could affect global financial stability moving forward – especially if crypto starts to become more intertwined with global financial systems and our everyday lives.
Some of the risks identified by the FSB include:
Market Liquidity: Cryptocurrency ownership is concentrated among a relatively small group of people, according to the FSB. This limits the ability to transact using cryptocurrencies, and it means volatility can be especially harmful. The FSB also mentions that crypto-based derivatives were hoped to bring more depth and liquidity to the market, but their impact has been insignificant in building liquidity.
Market Fragmentation: The market is fragmented because many crypto trading venues are not registered. This means that the market network is not complete and customers are not protected by law. In other words, too many crypto users are trading on unregulated, unlicensed exchanges, and this is exposing a significant portion of the crypto market to a problem.
Volatility: Bitcoin and Ethereum have crashed over the past year, rising near $20,000 and $1,400, respectively, at various points over the past 12 months. The FSB specifically notes that BTC and ETH have experienced changes in price 13 times higher than that of similar assets like the Euro and gold. This creates a risk of a market crash.
Leverage: Leverage is also seen as a danger to the crypto community. Leverage, or credit extended by a trading company, harms market stability in a number of ways. The report shows that nearly 20% of users bought their cryptocurrency with debt, for example.
Technology Risks: The FSB also expressed concern with the technology behind cryptocurrencies, claiming there were concerns about the long-term viability of mining-based blockchains. Energy consumption and the push towards a monopoly, for example, are seen as two major problems for cryptocurrencies moving forward.
Decentralization Risks: The FSB notes that the decentralized nature of cryptocurrency networks makes them difficult to fix and vulnerable to hacks.
Institutionalization: Cryptocurrencies are becoming increasingly institutionalized, and major financial firms are seeking to get involved with crypto. The FSB is worried about the implications of this activity. They claim that when institutions get involved with crypto, it could weaken confidence in those institutions. Some people might think less of an institution if it begins offering bitcoin trading, for example, and that could weaken confidence in the financial system.
The FSB Recommends “Vigilant Monitoring” Across the Crypto Space
The Financial Stability Board concluded its report by recommending “vigilant monitoring” for the crypto community.
The FSB released a similar report back in July when they concluded that cryptocurrency was not yet a threat. However, that report fell short of recommending “vigilant monitoring” for the industry. Clearly, the FSB feels that major changes have taken place over the last six months that warrant a shift in policy.
The FSB consists of representatives from the finance departments and central banks of all members of the G20. The board includes members from 68 different institutions in total. The FSB is chaired by Bank of England Governor Mark Carney and funded by the Bank of International Settlements. There’s no enforcement power: it’s just an advisory board for the G20, which consists of the twenty largest economies in the world.