Framing in Times of Inflation: “Crypto Could Have Devastating Effects on Global Financial Stability”?

Cryptomarkets a threat to global financial stability?

That is what the Financial Stability Board (FSB), an international organization that monitors and makes recommendations for the global financial system, concludes in a recent report.

In the research published on Wednesday, the FSB looked at potential vulnerabilities connected to unbacked crypto assets like Bitcoin, stablecoins (crypto tokens pegged to the value of real assets) and decentralized finance (DeFi) It also investigated cryptocurrency exchanges.

The FSB is currently chaired by De Nederlandsche Bank President Klaas Knot and is funded by the Bank for International Settlements, the oversight group for worldwide central banks.

The report said:

“Although the global crypto market is still relatively small and the extent of crypto use around the world varies, risks to financial stability could rapidly escalate.”

It continued:

“Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.”

The report acknowledged the growing curve and maturity of crypto markets could have implications on status quo:

“Nevertheless, institutional involvement in crypto-asset markets, both as investors and service providers, has grown over the last year, albeit from a low base. If the current trajectory of growth in scale and interconnectedness of crypto-assets to these institutions were to continue, this could have implications for global financial stability.”

In addition, the authors suggests that the rapid growth of DeFi and stablecoins could have devastating effects if something were to go wrong.

“Were a major stablecoin to fail, it is possible that liquidity within the broader crypto-asset ecosystem (including in DeFi) could become constrained, disrupting trading and potentially causing stress in those markets. This could also spill over to short-term funding markets if stablecoin reserve holdings were liquidated in a disorderly fashion.”