Cryptocurrencies are currently not a threat to financial stability, according to the Financial Stability Board, a global regulator that advises the G-20 group of countries.
In a report delivered to the G-20 finance ministers, the international body of financial regulators said, “While the FSB believes that crypto-assets do not pose a material risk to global financial stability, at this time it recognizes the need for vigilant monitoring in light of the speed of market developments.”
To this end, the FSB, together with the Committee on Payments and Market Infrastructures, developed a framework to monitor the financial stability implications of developments in the crypto-asset markets. The report sets out the metrics that the FSB will use to monitor crypto-asset markets as part of its ongoing assessment of vulnerabilities in the financial system. The monitoring system will help “mitigate risks to consumer and investor protection, market integrity, and potentially to financial stability,” the regulator said.
The FSB’s monitoring will focus on the price volatility of crypto assets, the size and growth of initial coin offerings, the wider use of cryptocurrencies in payments and the market’s volatility compared to gold, currencies and equities.
“Monitoring the size and growth of crypto-asset markets is critical to understanding the potential size of wealth effects, should valuations fall,” the FSB said in its report.
“The use of leverage and financial institution exposures to crypto-asset markets are important metrics of transmission of crypto-asset risks to the broader financial system.”
In March, FSB Chair Mark Carney noted in a letter to G-20 finance ministers and central bank governors that crypto-assets raise a host of issues around consumer and investor protection, their use to shield illicit activity and concerning money laundering and terrorist financing.
Crypto-assets could pose risks to financial stability, he noted, if they became more widely used “without material improvements in conduct, market integrity and cyber resilience.”
However, at the same time, the technologies underlying crypto-assets have the potential to improve the efficiency and inclusiveness of both the financial system and the economy.
The report also highlighted the actions of other standard-setting bodies, including the CPMI’s work on applications of distributed ledger technology and its analysis of payment innovations.
The committee advised central banks to “proceed with caution” in the creation of their own cryptocurrencies. The CPMI plans to survey central banks on the issue later this year.
The International Organization of Securities Commissions, meanwhile, has established an initial coin offering consultation network and is developing a support framework to assist members in considering how to address domestic and cross-border issues resulting from ICOs that could impact investor protection. IOSCO is also discussing other issues around crypto-assets, including, for example, regulatory issues concerning crypto-asset platforms.
The Basel Committee on Banking Supervision, in turn, is assessing the direct and indirect exposures of banks to crypto-assets and how they should be dealt with.
Current Basel rules on bank capitalization make no reference to crypto-assets but once the Basel Committee has collected the data and assessed national rules on crypto-assets, it will “consider whether to formally clarify the prudential treatment of crypto-assets across the set of risk categories.”