Against the backdrop of the rapid rise of cryptocurrency enthusiasm among the general public, a regulatory voice has called for awareness around its ability to disrupt business as usual in the financial sector.
Addressing a Buenos Aires meeting of G-20 central bank governors and finance ministers, a letter was circulated as an agenda item by the Financial Stability Board. The current governor of the Bank of England and Financial Stability Board chairman, Mark Carney, issued the letter by way of a formal caution to his peers at the Argentina gathering.
The watchmen of financial stability, and vested interests
Carney on March 18, 2018 said that: “Wider use and greater interconnectedness could, if it occurred without material improvements in conduct, market integrity and cyber resilience, pose financial stability risks through confidence effects.”
Carney earlier in March 2018 called for greater regulation to bring an end to the “anarchy” surrounding cryptocurrencies. Epitomizing the top bankers’ attitude from all over the world, Carney is very enthusiastic about blockchain technology but as wary of virtual currencies.
In the latest report, he is at pains to point to the lack of regulation, potential for disruption and an overall erosion of confidence that cryptocurrency might engender on a global scale.
Additionally, Carney indicated that the FSB would be looking at possible data gaps and metrics to enable a careful monitoring of digital assets going forward. Set against the standard model, Carney foresees potentially unintended consequences for financial service providers, exchanges and ultimately the citizenry that could stem from virtual currencies’ explosive growth.
Along with many other central and private banks, the Bank of England has been conducting its own research and development on blockchain apps and has even mooted a digital currency linked to pound sterling.
Contextualizing the phenomenon, and notwithstanding Bitcoin’s massive surge and slump in December 2017, digital currencies are not a considerable risk factor to any nation’s financial stability. The single greatest reason for this is that the phenomenon is still but a bit part of the fraternity.
For now, crypto-assets don’t pose risks to financial stability, partly because they are still small relative to the financial system. Even at their recent peak, their combined global market value was less than 1 percent of global economic output, the FSB letter stated. In addition, the assets aren’t substitutes for currency and aren’t much used for financial transactions, limiting their links to the rest of the financial system.
An unwavering FSB eye from here on out
Chewing at the edges of the fundamental decentralization that is inherent with a blockchain system, Carney’s letter also mentions the global swaps market’s employment of clearinghouses.
In November 2018, the regulator will publish a preliminary assessment of post-crisis legislation pertaining to the use of clearinghouses. Considering whether “… there are unintended consequences, in particular relating to the costs and availability of clearing,” will be the report’s prime focus.
For many observers, it’s hard to sympathize with established banking’s concerns, particularly as other “unintended consequences” could mean banks slowly or quickly losing their hegemony over the world’s money supply.
Already gauged as imminent in 2016, financial markets’ adoption of blockchain technology is an inevitable scenario. Carney and others want the volatility of virtual currencies at least stemmed if not taken out of the equation so that stability continues while blockchain technology continues its inroads into the financial sector.