Can digital currencies threaten global financial stability?

The cryptocurrency market is growing rapidly and has the potential to threaten the stability of global financial markets.

Gone are the days when Bitcoin, Ethereum and other cryptocurrencies were considered niches of the financial market. In its most recent report, the Financial Stability Board (FSB) — an international body made up of officials from 24 major economies — said the “rapid evolution” of the digital currency market could quickly lead to a point where it could lead to a “Threat to global financial stability”.

This is due to the size of the digital currency market, structural vulnerabilities and the growing importance of digital currencies to the traditional financial system.

“Risks to financial stability could escalate rapidly,” the FSB said this week, stressing that policymakers need to take action to intervene.

The FSB’s assessment comes as large banks and corporations are increasing their participation in the cryptocurrency market due to customer demand, despite the huge volatility of this market.

On Feb. 17, bitcoin price fell nearly 8% as the entire cryptocurrency market sold off. That day, Sequoia Capital also promoted the digital currency segment with a new fund of 500-600 million dollars. 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 willing to enter the digital currency space and increase their presence in the digital asset space,” the FSB said. “If the current growth trajectory and the close alignment between digital assets and these institutions continue, it will impact global financial stability.”

In 2021, the cryptocurrency market cap will partially triple to 2,600 billion dollars. However, the benchmark at this threshold is still relatively small. Comparatively speaking, the global stock market now has a total size of more than 120,000 billion dollars.

So why is the FSB sounding the alarm? The organization explains that high volatility in the cryptocurrency market can trigger a series of unexpected events when big players enter the market. The FSB compares this to the development of the US housing market in 2008 – the trigger of the global financial crisis.

“As with the US subprime crisis, 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 reported last week that US President Joe Biden may issue an executive order directing government agencies to research and develop digital asset management strategies this week. Earlier this month, the US Congress also heard about the regulation of stablecoins (digital assets whose value is tied to a fiat currency or commodity).

However, UBS believes investors shouldn’t wait for direction from the authorities. “Officials can take a long time to get policies approved by Congress. In the meantime, they have to deal with matters within their currently very limited powers,” the weekly report was previously quoted by UBS as saying.

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