The global crypto-assets market is now measured in trillions of dollars, although not yet more than a small share of all financial assets. An international body recommending policy and tracking developments has raised a red flag over potential problems that cryptos may cause.

Bitcoin’s price action is volatile – falling from its highs above $68,000 last year to $42,000 yesterday (source: Coindesk) – and this is giving global regulators heartburn.

“Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system,” according to the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system.

Cryptos such as bitcoin have often been created by those seeking an alternative to state fiat currencies, with interest heightened by the massive central bank money printing, aka quantitative easing, since the global financial crash of 2008. Some advocates even talk of bitcoin as a “digital gold.” However, regulators have been concerned that it could be a conduit for money launderers and tax evaders. And central banks might fret that they could be put out of business if cryptos expand massively. 

Regulations vary, with some nations such as Switzerland taking a relatively liberal approach, while mainland China, on the other hand, has banned “mining” bitcoin. El Salvador has gone to the other extreme by saying that bitcoin counts as legal tender.

The FSB report looks at “developments and associated vulnerabilities relating to three segments of the crypto-asset markets.” Areas of focus include unbacked crypto-assets (such as bitcoin); stablecoins; decentralized finance (DeFi) and other platforms on which crypto-assets trade.

The report said that although the extent and nature of crypto-assets' use varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.

While capitalization of the crypto-asset market rose 3.5 times last year to $2.6 trillion, this remains a small share of total financial system assets.

“Direct connections between crypto-assets and systemically important financial institutions and core financial markets, while growing rapidly, are limited at the present time. Nevertheless, institutional involvement in crypto-asset markets, both as investors and service providers, has grown over the last year, albeit from a low base. 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 FSB said. 

Crypto-assets and other entities, including the infrastructure of distributed ledger technology known as blockchain, continue to be regular discussion points in wealth management circles. To some degree the sector has gone more “mainstream.” Large financial groups such as BNY Mellon, Julius Baer and Morgan Stanley, among others, are involved in varying degrees. This news service is looking at how wealth management industry figures think these technologies will change the industry, whether in the form of new monetary systems, back-office efficiencies, or new ways of protecting privacy and authenticating transactions safely.

Late last year, Fidelity Investments launched a physical bitcoin spot exchange traded fund in Canada, and it has launched a similar product in Europe. As noted by the Financial Times (2 December 2021), the ETF, called the Fidelity Advantage Bitcoin ETF, is designed to invest in “physical” spot bitcoin, a model the US Securities and Exchange Commission has so far rejected, rather than bitcoin futures contracts, which the US financial regulator has permitted.