Time to Ready Global Response to Crypto Risks, Regulators Say | Technology News

Hugh Jones and Tom Wilson

LONDON (Reuters) – The $ 2.6 trillion crypto market risk could rise rapidly, and regulators need pre-prepared measures to bring the sector down, the Financial Stability Board (FSB), which monitors risks to G20 economies, said Wednesday.

While cryptocurrencies such as bitcoin remain a small part of the financial system, data gaps make it difficult to assess their full use, and many investors do not fully understand what they are buying, the FSB said.

Traditional finance, such as large banks and hedge funds, is also becoming more involved, as well as derivatives that refer to cryptocurrencies in complex investment strategies, the FSB report said.

Thus, risks to financial stability could quickly escalate, underscoring the need for timely and proactive assessments of possible political reactions, the report said in a harsh statement by previous FSB statements that considered the crypt dangerous.

“If the current growth trajectory of the scale and the relationship of crypto-assets with these institutions were maintained, it could have implications for global financial stability,” the statement said.

Regulators are increasingly concerned about how the collapse of cryptocurrencies – markets that are highly volatile and still opaque – will affect the broad financial sector.

Last May, a sharp drop in bitcoin and ether after China tightened restrictions on cryptocurrencies led to falling yield yields on U.S. and German benchmark government bonds when investors dumped digital tokens as safe assets.

Deputy Governor of the Bank of England John Canliff said in October that the collapse of cryptocurrencies is a “likely scenario”.

Decentralized Finance (DeFi), a crypto-branch, is also rising on the FSB agenda. This allows users to lend, borrow and save in cryptocurrencies, bypassing traditional finance drivers such as banks and stock exchanges.

DeFi grew in popularity during the pandemic as low interest rates prompted investors to look for returns. DeFi has become a magnet for fraud and other crimes, creating additional problems for regulators.

“Without sufficient regulation and control over the DeFi market and related platforms, there may be a risk to financial stability,” the FSB report said.

Robert Ophel, chairman of the French securities division AMF, said last week that regulators are behind the curve and that the FSB could have its first global structure for stablecoins and digital asset service providers in a matter of months.

The FSB has no authority to impose binding rules, but its members are committed to translating agreed principles into national rules.

The European Union is ahead of the adoption of a new law regulating cryptocurrency markets, but regulators say a global approach is also needed given the cross-border nature of the sector.

(Report by Hugh Jones and Tom Wilson; edited by Raisa Kosalowski)

Copyright 2022 Thomson Reuters.

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