Institutional involvement in crypto-asset markets, both as investors and service providers, has grown over time. Just in 2021 Crypto-asset market capitalisation raised by 3.5 times to $2.6 trillion. Therefore, the FSB concluded that Crypto-assets cloud represent a threat to global financial stability due to their scale, structural vulnerabilities, and increasing interconnectedness with the traditional financial system.
The report examines developments and associated vulnerabilities relating to three segments of crypto-asset markets:
- Unbacked crypto-assets
- Stablecoins
- Decentralized finance (DeFi) and crypto-asset trading platforms
However, the FSB notes the close, complex, and constantly evolving interrelationship between these three segments.
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Crypto-assets |
Crypto-assets, as the term is used in this report, are a type of private sector digital asset that depends primarily on cryptography and distributed ledger or similar technology |
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Characteristics |
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Stablecoins:
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A category of crypto-assets that aim to maintain a stable value with reference to a specified asset, or basket of assets, and provide perceived stability when compared to the high volatility of unbacked crypto-asset. |
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Uses of Stablecoins:
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Decentralised Finance (“DeFi”) |
DeFi is based on distributed ledger technology (DLT) (typically public and permissionless blockchains) to offer financial services and products purportedly without the need for intermediaries.
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Distinguishing DeFi from traditional finance |
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Vulnerabilities associated with crypto-asset markets:
- Increasing linkages between crypto-asset markets and the regulated financial system
- Liquidity mismatch, the structure of stablecoins means they are exposed to liquidity mismatch, credit and operational risks, which makes them susceptible to sudden and disruptive runs on their reserves
- The increased use of leverage in investment strategies
- Concentration risk of trading platforms
- The need of effective regulation and oversight commensurate to the risks they pose, both at the domestic and international level
- Low levels of investor and consumer understanding of crypto-assets, money laundering, cyber-crime and ransomware
