The Financial Stability Board (FSB) has outlined the risks to the financial system posed by crypto-assets, warning “vigilant monitoring” is required to protect from future threats to global financial stability.

Crypto-assets such as Bitcoin have faced increasing pressure from regulators and public bodies in 2018, with the Bank of England and the Treasury both calling for regulation of the growing market, and the Financial Conduct Authority set to publish a review before the end of the year.

Total market capitalisation of crypto-assets was approximately $830bn as of 8 January, according to the FSB, before a sharp subsequent decline in the following months. Current market capitalisation as of 11 October stands at roughly $201.7bn according to crypto-asset site coincheckup.com.

In its report Crypto-asset markets: Potential channels for future financial stability implications, published on Wednesday (10 October), the FSB explained: “The growth of crypto-asset trading platforms (often misleadingly called ‘exchanges’), the introduction of new financial products (such as crypto-asset funds and trusts and exchange-traded products), and the growing interest by retail investors, raise questions about the implications of crypto-assets for financial stability”.

Specifically, the FSB identified low liquidity, the use of leverage, market risks from volatility, and operational risks as the most problematic aspect of crypto-currencies. It said they 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”.

The FSB warned these risks could have implications for confidence in and the reputation of financial institutions and regulators.

It also identified “broader policy issues” it said were “subject of work at national and international levels and are outside the primary focus of this report”, including the need for consumer and investor protection, strong market integrity protocols, anti-money laundering and combating the financing of terrorism regulation.

In addition, the FSB said its members should consider “regulatory measures to prevent tax evasion, the need to avoid circumvention of capital controls, and concerns relating to the facilitation of illegal securities offerings”.

It said crypto-assets posed risks to the financial system arising from “direct or indirect exposures of financial institutions”, and there would be further risks “if crypto-assets became widely used in payments and settlement”. The FSB also noted there were risks posed “from market capitalisation and wealth effects”.

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 11 October 2018.

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Further reading on this topic:

Cryptocurrency-based financial products in the glare of the regulator