The cryptocurrency boom poses new risks to financial stability. Crypto assets open up a whole new universe of possibilities. Payments are simple and quick. Financial services that are cutting-edge. Access to previously “unbanked” portions of the globe for all. The cryptocurrency boom ecosystem enables all of this.
Due to insufficient or inadequate disclosure and regulation, consumer protection risks remain high.
However, with opportunity comes risk and challenges. The most recent Global Financial Stability Report outlines the risks posed by the cryptocurrency boom ecosystem. And suggests policy alternatives for navigating this unknown zone.
What Is the Crypto Ecosystem and What Is at Risk?
Exchanges, wallets, miners, and stablecoin issuers are all part of the thriving ecosystem.
Many of these organizations don’t have good operational, governance, or risk management processes. During instances of market turmoil, crypto exchanges, for example, have experienced major outages. There have also been some high-profile incidents of consumer money being stolen as a result of hacking. These incidents have had little influence on financial stability so far. However, as crypto assets become more widespread. Their importance in terms of broader economic ramifications expected to grow.
Consumer Protection Risks Remain Substantial
Due to insufficient or inadequate disclosure and regulation, consumer protection risks remain high. For example, over 16,000 tokens have listed on various exchanges. With approximately 9,000 still existing today, the remainder have vanished in some manner. Many of them, for example, have no volumes or the developers have abandoned the project. Some were most likely constructed merely for the sake of speculation or even plain deception.
The (pseudo) anonymity of crypto assets also leaves regulators with data gaps. Which can lead to money laundering and terrorist financing. Authorities may be able to track illegal transactions. But they may not be able to identify the individuals involved. Furthermore, the crypto ecosystem is governed by several legal frameworks in various nations, making collaboration more difficult. Most crypto exchange transactions, for example, are conducted through firms based in offshore financial centers. Without international cooperation, supervision and enforcement are not only difficult, but almost impossible.
Stablecoins, which attempt to anchor their value to the US dollar, are also rising at breakneck speed. Their supply will more than double to $120 billion by 2021. The word “stablecoin,” on the other hand, encompasses a wide range of crypto assets and can be deceptive. Some stablecoins may experience runs as a result of the composition of their reserves. Causing ripple effects across the financial system. Investors may concerned about the quality of their reserves or the speed with which reserves can liquidated. To meet future redemptions, prompting the runs.
Significant Challenges Ahead
Although it’s difficult to gauge the extent to which crypto assets are being adopted. Surveys and other indicators imply that emerging market and developing economies are leading the way. The people of these countries, in particular, raised their trading volumes on crypto exchanges dramatically in 2021.
Looking ahead, widespread and rapid adoption could offer substantial issues by supporting dollarization dynamics. In the economy—or, in this case, cryptoization in which residents begin to use crypto assets instead of local money. Central banks’ ability to properly conduct monetary policy may harmed by cryptography. It could also endanger financial stability by increasing the prominence of some of the previously outlined threats. In which consumer protection and financial integrity, such as funding and solvency problems stemming from currency mismatches.
Given the potential for crypto assets to aid tax evasion, threats to fiscal policy may become more serious. In addition, seigniorage (earnings derived from the authority to issue currency) may fall. Increased demand for crypto assets could also help to expedite capital outflows. Which could have an influence on the foreign currency market.
Finally, given the large amount of energy required for mining activities. A migration of crypto “mining” activity out of China to other emerging market. And developing economies can have a significant impact on domestic energy use. Especially in countries that rely on more C02-intensive forms of energy. As well as those that subsidize energy costs.