FSB sounds alarm on the global financial risks posed by crypto assets

• The FSB has published a report alerting the public to the financial instability risks brought by crypto.
• One long-time crypto investor has dismissed the report as “fear-mongering,” saying the industry’s size is unproportional to the said risks.

An international body has once again reiterated the warning that crypto-assets pose significant risks to global financial stability. The Financial Stability Board (FSB) monitors and makes recommendations about the global financial system. 

Its latest report warns that crypto’s scale, structural weaknesses and rising interrelatedness with the traditional financial system are risk catalysts. The FSB notes the increased uptake of digital assets even though they still take up a small portion of the overall financial system. Crypto’s market capitalization grew 3.5x in 2021 to $2.6 trillion – placing it at par with tech colossal Apple.

Additionally, the versatility of their uses has become quite obvious in recent times. For instance, convoy protesters in Ottawa and other parts of Canada started collecting donations in Bitcoin after traditional financing channels were blocked by the government. The same has been witnessed in Ukraine where activists are crowdfunding through crypto in preparation for a potential war with Russia.

FSB warns of financial risks associated with the crypto market

The FSB states that market systems such as banking have been largely shielded from the volatility of crypto assets. However, the increase in the interconnectedness between digital assets and large financial institutions could prove distractive. This is more so in the absence of comprehensive regulation by the government.

The report claimed further financial threat due to the emergence of stablecoins, as it urged additional regulatory oversight on the same.

Were a major stablecoin to fail, it is possible that liquidity within the broader crypto-asset ecosystem … could become constrained, disrupting trading and potentially causing stress in those markets.

Ryan Clements, an assistant professor at the University of Calgary has backed these claims. In his opinion, the potential of stablecoins to be used globally as payment mechanisms could impact monetary policy, alongside national security. He sees the early definition of the industry’s risks as a critical aspect in developing the already existent regulation.

Financial instability claims are “fear-mongering”

The calls for increased supervision of the crypto industry have been echoed repeatedly in different countries worldwide. Canada’s Conservative MP Michelle Rempel Garner introduced three-year crypto regulating bill earlier this month. US regulatory agencies and senators such as Elizabeth Warren have also been aggressive champions of regulation.

Boris Wertz, the founder of Vancouver-based VC firm Version One Ventures and a long-time crypto investor, said regulators have already addressed the issues presented by the FSB. Canada, for one, requires crypto exchanges to abide by the securities laws. Wertz has therefore dismissed the organization’s report as “fear-mongering.”

Moreover, he said that the level of system risk the FSB is suggesting is unproportional to the small size of the crypto sector.

“I think a lot of these reports underestimate how small crypto still is in the overall context of global finance,” said Mr. Wertz.