A new report to be released by an international body says crypto assets could present a significant risk to global financial stability.
The Financial Stability Board, which monitors and makes recommendations for the global financial system, warned that scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system could lead to the quick escalation of risk.
Crypto assets include cryptocurrencies such as bitcoin, and stablecoins, such as tether.
While they still make up a small part of the overall financial system, the market capitalization for these assets globally grew by 3.5 times in 2021 to US$2.6-trillion, according to the FSB.
The versatility of crypto assets have become increasingly obvious during recent weeks in Canada, as protesters in Ottawa and elsewhere started collecting donations in the form of cryptocurrency after their access to traditional channels was blocked.
The FSB report notes that while markets systems – such as everyday banking – have largely been shielded from the price volatility of crypto assets, the growing interconnectedness of cryptocurrencies and large financial institutions could be detrimental if governments do not regulate the sector more comprehensively.
It claims this threat has grown with the emergence of the stablecoin, a type of cryptocurrency tied to an underlying asset, such as the U.S. dollar.
“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,” the report warned while calling for more regulatory oversight.
Such calls have been echoed in Canada. Early this month, Conservative MP Michelle Rempel Garner introduced the first bill calling for the regulation of cryptocurrencies in Canada within the next three years. Before imposing restrictions, she said, lawmakers should consult with those working in the industry.
Yet regulators have already addressed many of the issues the report is citing, said Boris Wertz, founder of Vancouver-based VC firm Version One Ventures and a long-time investor in cryptocurrency startups, who called the report “fear mongering.”
Indeed, under Canadian law, crypto exchanges are subject to securities requirements. On Tuesday, those legal limitations were extended in the Emergencies Act to include restrictions on crypto crowdfunding.
Moreover, Mr. Wertz says that the crypto sector is still too small to present significant system risk of the sort the Financial Stability Board is suggesting.
“I think a lot of these reports underestimate how small crypto still is in the overall context of global finance,” said Mr. Wertz, adding that the total crypto asset market cap is comparable to that of Apple Inc., currently around US$2.8-trillion.
Yet defining the areas of risk early will be important in developing the regulation we already have, said Ryan Clements, assistant professor of business law and regulation at the University of Calgary. Stablecoins, in particular, present a range of unique risks given their potential to be used globally as a payment mechanism, he said.
“There’s a potential for runs on stablecoins. That can impact monetary policy, and that can impact national security,” Prof. Clements said.
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