The ECB has today released a report on the financial stability risks associated with crypto. It highlights that if current trends in growth and market integration persist then crypto-assets will have an impact on financial stability.
The report entitled “Decrypting financial stability risks in crypto-asset markets”, categorises the perceived threats that crypto brings to the safety of retail investors, and to the financial stability of the Euro zone as a whole.
The report does acknowledge that there has been increased demand for crypto from retail and institutional investors alike. It points out though that while the crypto market represents only 1% in size of the entire global financial system, it is still a similar size to the subprime mortgage markets that brought the financial system crashing down in 2008/9.
The high levels of volatility were mentioned, but it was acknowledged that this had decreased over the years.
The usefulness of crypto as diversification in portfolios was cast into doubt, citing the correlation that had been seen over recent weeks between crypto and other high-risk assets.
The report claimed that crypto-assets were not suitable for most retail investors, given that they were not good stores of value, nor were they reliable as a means of payment. The report warned that investors could lose “a large amount” or “all” the money they had invested.
It was noted that the risk of “contagion” for mainstream institutions had not so far happened, but that this was an increasing likelihood over time. Financial stability risks would also become more likely as the growth in private digital assets increased.
EU regulation was said to have been proposed, but that it was still at the agreement stage. It was also noted that information and data was not clear enough in order to assess the financial stability risks properly.
Other concerns in the report include a slight increase in crypto-asset leverage, crypto lending and yield, and rehypothecation.
The report concluded that as crypto-asset markets evolved, they would pose greater risks to financial stability. The “interconnectedness” between financial markets and crypto signals the potential for financial stability risks, and finally, the importance of “closing regulatory and data gaps in the crypto-asset ecosystem” was flagged up.
For one of the primary pillars of the existing financial system the negativity of this report was probably not to be unexpected. The ECB president Christine Lagarde only recently said in public that crypto was “worth nothing” and that a future European central bank digital currency would be a safer store of value.
It is to be hoped that the U.S. government agencies will come up with a more rounded and fairer feedback than this when they report back to government.
However, crypto is taking on the combined might of the entire traditional financial system, and there are bound to be many set-backs, as those more familiar with many decades old rules get to write the regulations.
For the beaten-down retail investor, hope springs eternal that crypto doesn’t become just another playground for accredited investors, and that the unfairness of the banking system doesn’t propagate into the sector.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.