Financial Stability Board’s View on Crypto-Assets

By Jim Bulling and Edwin Tan

On 10 October 2018, the Financial Stability Board (FSB) released a report assessing the risks and implications of crypto-assets on financial stability.  The FSB considered that the growth of crypto-asset trading platforms, the introduction of new financial products (crypto-asset funds and exchange-traded products) and growing interest by retail investors together could lead to implications on global financial stability.

In its report, the FSB assessed the primary risks in crypto-asset markets which could expose and undermine confidence in the financial system and in financial regulators.

These include:

  • the susceptibility of many crypto-asset networks to operational challenges from targeted attacks and relatively benign applications, due to their lack of ability to quickly process large numbers of transactions at the same time;
  • their decentralised nature resulting in inadequate governance, which gives rise to disputes and causes difficulty in resolving technological limitations or errors;
  • the exposure of financial institutions to crypto-asset markets through the provision of custody services and credit to crypto-asset trading platforms and wallet providers; and
  • the use of crypto-assets as collateral for consumer and business loans which may lead to margin calls, defaults and reduced borrowing.

The FSB has committed to monitoring the risks and will start to collect certain metrics including the market capitalisation and volatility of major crypto-assets, the trading volumes of crypto-asset derivatives and the use of crypto-assets in payment and settlement systems.

The FSB concluded that crypto-assets do not currently pose a material risk to global financial stability, partly due to the limited size of crypto-asset markets relative to the global financial system, at about $210 billion USD or 0.9% of the market capitalisation of the S&P 500 as at 4 October 2018.  However, there are broad policy issues to be addressed and vigilant monitoring is needed in light of rapid market developments.

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