The rapidly growing crypto market could pose a threat to global financial stability, according to a Financial Stability Board (FSB) report published on Wednesday.
- The FSB, an international body that monitors and makes recommendations about the global financial system, identified vulnerabilities related to unbacked assets such as Bitcoin, stablecoins such as USDT and decentralized finance (DeFi).
- The FSB identified liquidity mismatch, rising use of leverage, concentration risks due to high dependence on trading platforms, and lack of regulatory oversights as concerns surrounding the industry.
- FSB highlighted stablecoins as being susceptible to sudden and disruptive runs on their reserves through credit and operational risks with the potential to spill over to short-term funding markets.
- Stablecoins have already drawn the attention of global regulators including the U.S. and Hong Kong, with the latter recently releasing a discussion paper on stablecoins to collect public feedback on how to proceed with regulation.
- While direct connections between the crypto industry and traditional markets remain limited at this stage, the FSB urged global lawmakers take pre-emptive approaches to regulating these assets.
- The crypto market cap more than tripled in 2021 to break US$3 trillion in November, but has since fallen back to just under US$2 trillion at press time.