December 5, 2022

(Kitco News) The fast-growing crypto market could soon pose a significant threat to global financial stability, according to a report by the Financial Stability Board (FSB), a risk-monitoring international organization for the G20 economies.

“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 said in a report that was published on Wednesday.

If the pace of rapid adoption is maintained at current levels, regulators across the globe need to be ready for all types of risks and have prepared policy responses on hand.

The report said that the crypto market cap grew 3.5 times in 2021 to $2.6 trillion. “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.”

Some of the concerns the FSB pointed to included increasing interconnectedness between crypto and the regulated financial system, liquidity mismatches, rising use of leverage in investment strategies, concentration risk of trading platforms, and lack of regulation.

The FSB also noted a gap in public understanding of the crypto space compared to the levels of involvement.

Risks associated with the popularity of stablecoins were also highlighted, including regulatory compliance and sufficiency of reserve assets.

“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,” the report said.

The report concluded that the FSB would continue to keep track of the developments and new risks in the crypto space.

“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 report noted.

The Financial Stability Board was established in 2009 after the G20 London summit. It’s an international organization in charge of monitoring and making recommendations about the global financial system.

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