Is Crypto A Financial Stability Threat?
Cryptocurrency, an encrypted data series that relates to a measure of currency. It is monitored and organized by a peer-to-peer network called a blockchain, which also serves as a secure ledger of transactions. That’s a lot of words which put together I’m not sure even the founder of Bitcoin could explain to someone. In simpler terms, it’s an online currency system, not governed by any central bank or organisation. These extremely volatile assets are based around the concept of anonymity and independency from control, so is this a threat to the economy?
When crypto is mentioned, most people jump to Bitcoin. However, the previously dominant and famous Bitcoin is now just the surface of this decentralised currency network. Bitcoin’s market share of all cryptocurrencies has plummeted from near to 100% down to 45%. While it remains the dominant force, the rise of altcoins has undoubtedly been significant and this raises stability concerns to the economy. With new currencies released every day, the market is growing in significance which has led to the investor network to develop over the last decade.
So, should we be concerned?
The growth of the currency has certainly been drastic and this also creates the chance of financial institutions offering crypto products or entering the market. If the financial services industry began to expose themselves to the extreme volatility of cryptocurrency, it is possible that stability may be in jeopardy. Thankfully, while exposure is low to the industry at the moment anyway, the market value of cryptocurrency is typically tied to the value of other assets in the alternative investment space – such as NFT’s.
Even so, with a future threat possible and the recent drop of many currencies recently, should the market be regulated? Many make the comparison to the threat of the financial crash and there are certainly similarities. For example, the use of cryptocurrency in the whole financial asset space is similar to sub-prime mortgages in 2007 (1%). The pivotal difference lies with the fact that while ignorant bankers rushed into the profitable market space in the run up to the credit crunch, major financial institutions are severely hedging or avoiding crypto all together in 2022. The fact that exposure is low should provide some reassurance to the general public.
With this being said, the UK have decided to bring in some light regulations which will predominantly affect providers. They will be forced to include warning notices and the FCA will supervise the major agents – such as Binance. While the current precautions can be compared to health warnings on a pack of cigarettes, the acknowledgment of regulation can provide an insight into potential tightening in the near future. The EU could see even more regulation as MiCA (Market in Crypto Assets) was launched by the European Commission as a watchdog for the industry and has begun to tighten their legislation.
However, this raises concerns over cryptocurrency’s purpose as it moves forward. If stronger regulation is on the horizon then will the sole purpose of the asset be lost? I certainly think we can assume that strong levels of government intervention could lead to a reduced stage for cryptocurrency as the bridge between itself and standard currency falls.