Global Financial Regulators Call For Urgent Action to Curb Crypto Risk

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Global Financial Regulators Call For Urgent Action to Curb Crypto Risk
Global Financial Regulators Call For Urgent Action to Curb Crypto Risk

The market cap of crypto assets like bitcoin and ether has grown from around $350 billion in early 2020 to more than $3 trillion last year. It’s since fallen to just over $2 trillion. So far, global regulators have taken a number of steps to accept cryptocurrencies

Global Financial Regulators Call For Urgent Action to Contained The Crisis in Crypto Markets 

According to a report on February 16, top policymakers called for urgent action to ensure the crisis in digital asset markets can be contained. The risks to global financial stability posed by cryptocurrencies could “quickly escalate,” top policymakers warned.

The Financial Stability Board, which advises G20 countries on financial rules, said on Wednesday that given their growing attachment to the traditional financial system, policymakers must act quickly to create rules for digital asset markets.

“There is clearly a higher level of urgency,” said Klaas Knot, the governor of the Dutch central bank, who became chairman of the Basel-based FSB in December, describing how the board was previously “comfortable” in saying that crypto has no significant risks due to its size and lack of connection to traditional financial markets.

“What we are seeing now is … not only has the scope expanded rapidly, but the touchpoints with traditional financial intermediaries have also increased, requiring the FSB to draw more attention,” he added.

Crypto Market Connections to the Financial System Difficult to Assess Due to Significant Data Gaps

Some parts of the crypto market and its connections to the rest of the financial system are difficult to assess due to “significant data gaps,” the FSB said.

The FSB is working on a global standard for digital assets which, according to Knot, should make “considerable progress in 2022”.

In a crypto risk release on Wednesday, the FSB warned that the collapse of major cryptocurrencies could have a huge impact by triggering a crisis of confidence in other asset classes.

Even a single crypto asset (like a stablecoin) — a crypto asset whose value is pegged to a fixed currency or basket of currencies — cannot predict “the destabilizing impact of the entire financial sector,” Knot said. But he said that with the dramatic increase in the size of the cryptocurrency market, the likelihood of contagion to other parts of the financial market “has certainly increased.”

The FSB also warned that major banks and other systemically important financial institutions are “increasingly willing” to delve into cryptocurrencies, noting that global stablecoins pose particular financial risks.

“The disorderly functioning caused by a loss of confidence in (global stablecoins) that have reached significant size could disrupt the real economy and spill over into the broader financial system,” the FSB said.

The FSB and others are already working on how to manage the risks posed by global stablecoins.

“Regulation is always a passive business because innovation happens in industry,” Knot said. “We will always remain in the second tier, but I think the gap between the coaches in the first and second tier will narrow over time. There is definitely more urgency now.”