Global Financial Stability Threatened by Digital Assets – FSB
(18 February 2022 – Europe) The Financial Stability Board (FSB) updated assessment of risks to financial stability from crypto-assets has found digital assets could represent a real threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness.
Digital asset markets are fast evolving and the close, complex and constantly evolving interrelationship between unbacked crypto-assets (such as Bitcoin),Stablecoins, decentralised finance (DeFi) and crypto-asset trading platforms need to be considered holistically when assessing related financial stability risks.
Vulnerabilities associated with crypto-asset markets include,
- Increasing linkages between crypto-asset markets and the regulated financial system
- Liquidity mismatch, credit and operational risks that make Stablecoins susceptible to sudden and disruptive runs on their reserves, with the potential to spill over to short-term funding markets
- The increased use of leverage in investment strategies; concentration risk of trading platforms
- The opacity and lack of regulatory oversight of the sector
Chaired by Klaas Knot, President of De Nederlandsche Bank, the FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements (BIS).
“Financial stability risks could escalate rapidly and calls for timely and pre-emptive evaluation of possible policy responses. The rapid evolution and international nature of crypto-asset markets raise the potential for regulatory gaps, fragmentation or arbitrage. In light of the growing threat to financial stability, we intends to update previously published guidance on global stablecoin arrangements which will identify how any gaps could be addressed by existing frameworks” FSB regulators including the European Central Bank (ECB), Bank of England (BoE) and Federal Reserve note in the report.
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