What has happened?

A report by the Financial Stability Board (FSB), which co-ordinates financial regulation among the G20 economies, has concluded that cryptoassets do not currently pose a material risk to global financial stability, but monitoring is necessary to protect consumers.

What does this mean?

The report comes after an initial assessment set out in the FSB Chair’s March 2018 letter to G20 Finance Ministers and Central Bank Governors and the summary of the work of the FSB and standard-setting bodies on cryptoassets the FSB released in July.

Entitled "Crypto-asset markets – Potential channels for future financial stability implications", the report reviews only private cryptoassets and does not deal with central bank digital currencies or cryptoassets issued by other public sector entities.

The report includes an assessment of the primary risks related to cryptoassets and their markets, such as low liquidity, the use of leverage, market risks from volatility and operational risks.

“Based on the available information, cryptoassets do not pose a material risk to global financial stability at this time. However, cryptoassets raise several broader policy issues… and vigilant monitoring is needed in light of the speed of market developments,” the FSB concluded.

The report states that, should the use of cryptoassets continue to evolve, this could have implications on financial stability, including affecting the confidence the public has in financial institutions and their regulators.

Other potential implications include risks arising from exposures of financial institutions, risks arising if cryptoassets became widely used in payments and settlements, as well as risks from market capitalisations and wealth effects.

"Assessing and monitoring these potential risks is challenging," the report states.

Partly, this is because not much information is available on the "potential materiality of risks", information being particularly patchy "on the extent of leverage in cryptoasset markets, and on direct and indirect exposures of financial institutions".

The FSB concluded that this "paucity" of relevant and reliable data means that further monitoring and analysis of the market is necessary, which the FSB will do via a framework developed jointly with the Committee on Payments and Market Infrastructures.

The report goes on to explain that cryptoassets also have implications outside financial stability concerns and raise other policy issues, such as consumer and investor protection, market integrity, anti-money laundering and combating terrorism financing, tax evasion, capital controls circumvention and the facilitation of illegal securities offerings.

However, these issues fell outside the scope of this report.

The report ends with a section on the regulatory and supervisory approaches and enforcement actions related to cryptoassets taken by FSB members.

According to the report, these actions try to balance the need to encourage innovation and the need to contain risks, especially those affecting consumer and investor protection and market integrity.

"While the FSB is vigilantly monitoring the potential financial stability risks associated with crypto-assets, it recognises that the underlying DLT may provide some important benefits in the future. Although there are a number of technical and other challenges to surmount, the technology may have applications for securities settlement, asset registers, trade reporting and financial inclusion, amongst others," the FSB said.

More on the FSB

The FSB brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

It is chaired by Mark Carney, Governor of the Bank of England, and its Secretariat is located in Switzerland and hosted by the Bank for International Settlements.

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