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Cryptocurrency Could ‘Destabilize’ Financial Sector: FSB

The threats that cryptocurrencies represent to global financial stability, according to the FSB’s chair, could “escalate swiftly.”

Crypto assets, according to Klass Knot, the Dutch central bank governor and FSB chair, pose a risk to the global financial system.
The Financial Stability Board is an entity that makes financial rules and regulations recommendations to the G20 governments.

The chair of the Financial Stability Board (FSB), a Swiss-based international organisation that offers financial sector recommendations, has warned that cryptocurrency might have a “destabilising influence across the financial system” that could “escalate swiftly.”

 

Klass Knot urged politicians to adopt laws for the digital asset market in a new research, claiming that “there is certainly a larger degree of urgency.”

The crypto market and the wider financial system, according to Knot and the FSB, are becoming increasingly intertwined. This is due to the fact that many traditional financial institutions are now exposed to cryptocurrencies in some way. Standard Chartered and Morgan Stanley, for example, have made direct investments in cryptocurrency and blockchain technologies.

Stablecoins, according to the FSB, also pose a severe risk due to their vulnerability to “disruptive runs on their reserves.”

 

Tether (USDT) and Circle (USDC), for example, claim that their stablecoins in circulation are entirely backed by cash reserves. The impact might leak over into traditional markets, according to Knot, if holders of these stablecoins simultaneously redeem their shares for the dollars (or other assets) that they represent, and the tokens are not completely backed.

 

“It’s probable that if a big stablecoin fails, liquidity within the broader crypto-asset ecosystem (including in decentralised finance) may become constricted, interrupting trading and potentially causing stress in those markets,” the FSB warned. “If stablecoin reserve holdings are liquidated in an orderly method, this could spill over into short-term funding markets.”

The FSB is especially concerned about the rise in leverage trading on unregulated cryptocurrency exchanges, which can offer up to 125x leverage. Because of the connection between crypto and the broader financial system, the FSB is concerned that a potential loss due to the use of heavy leverage might have an impact on the broader financial sector.

 

The FSB is particularly concerned about crypto and DeFi security and regulatory control. According to the research, “DeFi related hacks accounted for approximately 75% of the $481 million known total hack and theft volume of crypto-assets through September 2021.” “If the industry continues to grow in scale, the crystallisation of these vulnerabilities could have implications for the larger financial system’s functioning and confidence.”

According to Knot, the FSB is also working on developing worldwide rules for crypto assets, which will “advance quite a bit in 2022.” In 2020, the regulator issued a study with high-level suggestions for regulating stablecoins, including a risk management framework for reserve management.

 

Regulators are focusing their attention on cryptocurrency.

As the crypto ecosystem has grown in size over the last few years, the FSB’s warnings on stablecoins have escalated. However, Klass Knot is far from the only regulator interested in enacting regulations in the crypto industry. Gary Gensler, the chairman of the Securities and Exchange Commission, has been vociferous about the need for crypto laws to safeguard consumers.

Sir Jon Cunliffe, the Bank of England’s deputy governor for financial stability, has also stated that cryptocurrencies, if allowed unregulated, might lead to a financial crisis.

In an effort to prevent COVID-19 vaccination mandate protestors from accessing their assets, Canada recently invoked the Emergencies Act, which permits the government to freeze bank accounts and access funds, including cryptocurrency, without going through the judicial system.

Time will tell whether international financial institutions heed the FSB’s suggestions when the issue of regulation changes to actual regulatory action.

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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