Wednesday 16 February 2022 1:05 pm | Updated: Wednesday 16 February 2022 1:06 pm

Financial Stability Board sounds alarm over crypto assets

The Financial Stability Board has raised the alarm about the threat posed by crypto currencies to the global economy.

The FSB, which coordinates the work of national financial authorities and international standard-setting bodies, said that the surging adoption of digital assets and the growth of the crypto into a $2.6tn asset class last year has the potential to create a host of stability risks. The FSB called on regulators worldwide to urgently draw up possible policy responses to the growing institutional adoption of crypto assets.

“Crypto-assets 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,” the FSB report stated.

The FSB stressed the importance of international cooperation on crypto rules to reduce the risk of regulatory arbitrage or gaps.

“The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage,” the report said.

“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,” it added.

The report noted that the size of the crypto market puts it on a par with other key asset classes.

The total market capitalization of stablecoins, which the FSB claimed are susceptible to sudden and disruptive runs on their reserves, reportedly stood at around $157bn in December 2021, an increase from $5.6bn at the start of 2020. In aggregate, reported outstanding stablecoin assets are equivalent to almost a fifth of the size of US assets held in institutional and retail prime money market funds, which total $832bn.

Meanwhile, over $100bn was locked into DeFi projects in December 2021, despite the sector being subject to thefts and hacks which accounted for 75 per cent of the $481m known total hack and theft volume of crypto-assets through September 2021.