The Financial Stability Board (FSB), which advises the G20 on all matters related to finance, has concluded that cryptocurrency could potentially destabilize global finances. This conclusion comes via a recent FSB report titled “Crypto-asset markets: Potential channels for future financial stability implications.” A press release via Coin Desk reveals the details of this report: based on the limited size of the crypto-assets market, it currently doesn’t pose any material threat to global financial stability.
However, the report also states that “Should the use of crypto-assets continue to evolve, it could have implications for financial stability in the future,” thereby confirming the potentially highly disruptive nature of cryptocurrency. There are several factors that have led the FSB to this conclusion.
One is how crypto-assets offer low market liquidity and open avenues for price manipulation in the market. Currently, a relatively small number of people (compared to fiat currency) have ownership over cryptocurrency, and News BTC explains that this could make price manipulation easier to pull off. This is further reinforced by the fact that many crypto-trading venues are not registered, which means that many customers in the network are not protected by any existing trade or finance laws. Given these factors, market volatility can become especially harmful. And furthermore, the impacts of cryptocurrency-based derivatives remain insignificant to market liquidity – despite earlier hopes that they would actually increase it.
There’s also the risk of high volatility, which cryptocurrencies have been known to display. For instance, Finance Magnates claims that as of October 4, 2018, crypto giants Bitcoin and Ethereum shifted their prices up 13 times more than traditional stable assets like gold and the Euro. Meanwhile, even lesser known cryptocurrencies have been observed to display similar, sudden price changes in the past. These levels of unpredictability significantly raise the risk of a market crash occurring in the near future. In fact, unpredictability or high volatility is considered by financial experts to be a highly dangerous characteristic of the marketable asset.
This aspect of crypto-assets is especially relevant now to the UK and the European Union. Not only are these entities two of the biggest players in the global financial market, but they also haven’t yet agreed upon specific trade policies following the finalization of Brexit, an event that’s notoriously causing many assets in the European market to become highly volatile. Furthermore, this already apparent volatility is being reinforced by expert opinion on the matter, namely Mark Carney who’s not only the governor of the Bank of England but is also the current chair to the FSB. The Economic Calendar on FXCM provides volatility reports on speeches from key financial figures, and Mark Carney’s latest was shown as highly volatile. This reflects not only the current state of the UK’s economy but also the shifts in European and global economies. If crypto-assets continue to evolve and become more unpredictable while providing little to no increase in market liquidity, this could all lead to what the FSB fears: a continually unstable financial market.
While international banks and financial institutions used to dismiss cryptocurrency as a passing trend, even the financial advisors of the 20 wealthiest nations in the world are now openly warning about cryptocurrency’s potential to cause global financial instability.
