Addressing financial stability threats necessitates global cooperation, clear and robust regulatory frameworks, and improved market infrastructure. Financial authorities and central banks are increasingly focused on reducing the risks connected with cryptocurrency assets, notably in terms of market behaviour, consumer protection, and systemic stability. A balanced strategy will be required to promote both innovation and stability in this quickly changing sector.
The Financial Stability Board (FSB) has released a status Report on the policy roadmap for the introduction of crypto assets. According to the analysis, the total value of crypto assets was predicted to be $2.2 trillion as of August 30, 2024.
In September 2023, the G20 Leaders approved the path for implementing crypto-asset policies. The Roadmap outlined both planned and existing activities of the IMF, FSB, and key international SSBs.
The links between crypto-asset markets and traditional financial markets are currently modest but growing. Furthermore, the financial industry is developing, with asset managers and banks experimenting with distributed ledger technology (DLT), including tokenisation, in ways that have the potential to change the market structure. At the moment, DLT-based tokenisation does not represent a significant risk to financial stability, but it does have its own structural weaknesses.
As the relationship between traditional financial systems and the volatile crypto-asset market grows, future developments may pose complicated regulatory and systemic risk problems. This changing landscape need strong regulatory frameworks to manage risks while realising the potential advantages of enhanced efficiency, accessibility, and innovation in the financial industry.
Cryptocurrencies are not extensively integrated with crucial financial services (such as payments). Crypto-asset derivatives, which are traded on both regulated and unregulated/non-compliant marketplaces, provide enormous leverage, and their trading volume has increased dramatically to over $6 trillion by May 2024.
Although links to key financial markets and institutions appear to be limited in scope, they are growing and may continue to do so. Stablecoin issuers, in particular, are becoming large investors of traditional financial assets as their reserve asset holdings grow.
The borderless nature of crypto-assets allows issuers and service providers to conduct cross-border operations from offshore locations, including areas where the issuer or service provider is not licensed/registered, regulated, or monitored. Despite improvements in implementing applicable regulations, enforcement remains challenging.
According to FSB reports (citing unconfirmed sources), Tether has a significant portion of its reserves ($97.6 billion) invested directly or indirectly in US Treasuries, potentially making it one among the world’s 20 largest holders of US Treasuries.
The International Organisation of Securities Commissions (IOSCO) issued its Policy Recommendations for Crypto and Digital Asset (CDA) Markets in November 2023. In December 2023, Policy Recommendations for Decentralised Finance (DeFi) was also published.
Given the global nature of the crypto-asset markets, the risk of regulatory arbitrage, and the significant risk, retail investors remain vulnerable and this makes it imperative for a proactive IOSCO program to monitor and promote timely implementation of the CDA Recommendations. In December 2022, the Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the Basel Committee on Banking Supervision (BCBS), approved a worldwide prudential norm for banks’ exposure to crypto-assets. In July 2024, the BCBS completed the disclosure requirement for banks’ crypto-asset exposures.
Many crypto-asset issuers and service providers continue to operate without comprehensive regulation or in violation of applicable jurisdictional regulations, so it is critical that all jurisdictions fully, consistently, and timely implement the FSB Framework and relevant international standards.
The growth of cryptocurrencies and other crypto assets has presented both opportunities and difficulties to the global financial system. While they provide some potential benefits, such as decentralised finance (DeFi) and increased financial inclusion, they also pose considerable concerns, notably to financial stability. Addressing financial stability threats necessitates global cooperation, clear and robust regulatory frameworks, and improved market infrastructure. Financial authorities and central banks are increasingly focused on reducing the risks connected with cryptocurrency assets, notably in terms of market behaviour, consumer protection, and systemic stability. A balanced strategy will be required to promote both innovation and stability in this quickly changing sector.
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