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BY CNA team - October 11, 2018

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Cryptos not a threat to global financial stability

FSB says cryptos not a threat to global financial stability but warrants closer monitoring for underlying risks
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A report by the Financial Stability Board (FSB) has concluded that cryptocurrencies do not pose a material risk to global financial stability but does raise broader issues.

While not posting a material risk to global financial stability, it says that vigilant monitoring is needed in light of the speed of market developments.

The Basel-based FSB together with the Bank for International Settlements developed a framework to monitor the potential impact of cryptocurrencies on financial stability together with metrics monitoring such risks in a timely manner that were delivered to the finance ministers and central bank governors of the G20 in mid-July.

It reiterated that gaps in information on the extent of leverage in the crypto markets together with direct and indirect exposures of financial institutions still exists.

Because of the paucity of information, assessments and monitoring of potential risks are challenging, warranting further monitoring and analysis of the market, with the metrics used to be refined as more data is gathered.

However, the FSB recognises that the underlying blockchain technology may provide some important benefits in the future, including for securities settlement, asset registers, trade reporting and financial inclusion despite a number of technical and other challenges that need to be surmounted.

It points out that the primary risks of the crypto markets revolve around liquidity, volatility, leverage as well as technological and operational risks.

In particular, the ownership concentration of cryptocurrencies limits market depth and reduces the capacity of the markets to accommodate large trading volumes. “Illiquid markets may also exacerbate risks from volatility,” it adds.

There is a lack of information on the role that leverage plays in the market, with one recent survey showing that nearly 20% of cryptocurrency owners using debt to finance purchases.

Trading on margin, where allowed, provides leverage of between 2.5 times to 100 times.

“The total volumes of leveraged contracts and the extent of actual use of leverage at these trading platforms are generally not reported, and it is not clear which entities are providing the financing,” it says.

It noted that if cryptocurrencies become a more significant part of the financial system, negative developments involving them could undermine confidence in certain aspects of the financial system and in financial regulators.

“Additionally, the primary risks present in the crypto-asset markets could have financial stability implications through a variety of other transmission channels,” it says.

Cryptocurrencies do raise other broader policy concerns that are outside the scope of the report, such as the need for consumer and investor protection.

Other concerns include strong market integrity protocols; anti-money laundering and combating the financing of terrorism regulation and supervision, including implementation of international sanctions; regulatory measures to prevent tax evasion; the need to avoid circumvention of capital controls; and concerns relating to the facilitation of illegal securities offerings.

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