Summary

This article (Published as part of the Financial Stability Review, May 2022) discusses the risks to financial stability that are associated with crypto-assets, including unbacked crypto-assets such as Bitcoin, DeFi, and stablecoins. Despite concerns over money laundering, market integrity, and consumer protection, investor demand for crypto-assets has been increasing due to perceived opportunities for quick gains, unique characteristics, and benefits for institutional investors. However, the financial stability risks associated with crypto-assets have grown significantly since the end of 2020 and will become more severe if the current crypto industry’s growth trajectory and complexity continue. The article concludes that crypto-assets pose a risk to financial stability if financial institutions become increasingly involved with them.

Key points

  • The nature and scale of crypto-asset markets are evolving rapidly, and if current trends continue, crypto-assets will pose risks to financial stability.

The authors conclude that, to date, traditional finance (TradFi) has been able to remain mostly untouched by the ups and downs of crypto, but they also see an increasing interconnectedness. If that keeps growing at this rate, crypto-assets will pose risks to financial stability.

  • Systemic risk increases in line with the level of interconnectedness between the financial sector and the crypto-asset market, the use of leverage and lending activity. 

The authors conclude that the more connected the crypto-asset market and TradFi become, the great the risks to financial stability are. They also note that this is a global issue and that global coordination is key. 

  • It is important to close regulatory and data gaps in the crypto-asset ecosystem.

The authors conclude that the Market in Crypto-Assets (MiCA) Regulation is a good first step, but that regulators need to remain sharp to mitigate threads from the interconnectedness of crypto and TradFi. A large part of making sure that threads can be mitigated is to address any data gaps. The authors finish by that threads cannot be mitigated as long as there are no standardized reporting or disclosure requirements for the crypto industry and TradFi involved in crypto.

Authors

Lieven Hermans, Annalaura Ianiro, Urszula Kochanska, Veli-Matti Törmälehto, Anton van der Kraaij and Josep M. Vendrell Simón

Published in …

Financial Stability Review, May 2022

Published by …

European Central Bank (ECB)