Crypto assets market ‘poses threat to global financial stability’

The booming crypto assets market could pose a serious threat to financial stability if regulators fail to take action, a global watchdog has said.

The Financial Stability Board (FSB), which monitors financial authorities in 24 countries, is concerned that the scale and structural vulnerabilities of crypto markets - as well as increasing interconnectedness with traditional financial systems - have the potential to cause significant disturbance to the global economy.

"Although the extent and nature of use of crypto assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses," the Swiss-based body said in a report.

"Systemically important banks and other financial institutions are increasingly willing to undertake activities in, and gain exposures to, crypto assets. The prevalence of more complex investment strategies, including through derivatives and other leveraged products that reference crypto assets, also has increased.

"If the current trajectory of growth in scale and interconnectedness of crypto assets to these institutions were to continue, this could have implications for global financial stability."

The report estimated that crypto asset market capitalisation grew 3.5 times in 2021 to a value of $2.6tn (£1.9tn). It noted that crypto assets remain a small part of the overall financial system, but likened the risk to the sub-prime mortgage exposure that sparked the financial crisis of 2007-8.

"If financial institutions continue to become more involved in crypto asset markets, this could affect their balance sheets and liquidity in unexpected ways," the FSB continued.