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Crypto-assets are not a material risk to financial stability


The entire premise of crypto-assets such as Bitcoin was to by-pass the regulated financial system. That was how it started out: as a kind of revolution against a debased financial system that has produced increasingly worthless fiat currency. As long as central banks can print more money, and so create inflation, our money loses value. It happens incrementally, so few complain. Crypto cannot be inflated in the same way. There is a limited supply.

Now regulators are jumping all over the crypto-sphere. If it moves, it must be regulated. The problem is that crypto-assets work on a distributed ledger system that is not easily intercepted, and there are some cryptos, such as Monero, which are truly anonymous (unlike Bitcoin). Many more are starting to enter this space.

So this latest report that attempts to pose and then answer the question whether crypto assets are a risk to the financial system is a sign of where regulators want to steer this debate. Expect more regulation. Coins such as Minero are a nightmare for regulators.

From Accounting Daily:

The FSB has published a report which includes an assessment of the primary risks present in crypto-assets and their markets, such as low liquidity, the use of leverage, market risks from volatility, and operational risks.

The body, which coordinates at the international level the work of national financial authorities and international standard setting bodies, says based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account.

Its assessment concludes that, based on the available information, crypto-assets do not pose a material risk to global financial stability at this time.

It goes on to state: “However, vigilant monitoring is needed in light of the speed of market developments. Should the use of crypto-assets continue to evolve, it could have implications for financial stability in the future.

“Such implications may include: confidence effects and reputational risks to financial institutions and their regulators; risks arising from direct or indirect exposures of financial institutions; risks arising if crypto-assets became widely used in payments and settlement; and risks from market capitalisation and wealth effects.”

The FSB points out that crypto-assets also raise several broader policy issues, such as the need for consumer and investor protection; strong market integrity protocols; anti-money laundering and combating the financing of terrorism (AML/CFT) 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.

FSB members have to date taken a wide variety of domestic supervisory, regulatory, and enforcement actions related to crypto-assets. National authorities and standard-setting bodies have issued warnings to investors about the risks from crypto-assets, as well as statements supporting the potential of the underlying distributed ledger technology (DLT) that they rely on to enhance the efficiency of the financial system.

Crypto-asset markets: Potential channels for future financial stability implications is here