Cryptocurrencies, stablecoins no longer among top-10 financial risks: NY Fed survey

Editor’s Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today’s must-read news and expert opinions. Sign up here!

(Kitco News) – The Federal Reserve Bank of New York published a report on Friday which showed that cryptocurrencies and stablecoins are no longer among the top 10 perceived risks to financial stability.

The Financial Stability Report is based on a survey of 26 market contacts that was conducted from August through October 2022. The previous report, which was based on a survey of 22 respondents between January and April, had crypto tied for seventh among the most-cited risks over the next 12-18 months. The latest report places cryptocurrencies and stablecoins in 11th position.

The report did continue to echo the Fed’s ongoing concerns with cryptocurrencies, however. “Activities in the digital assets ecosystem can pose challenges to financial stability,” the Fed wrote. “Digital assets may offer a host of useful innovations and products. The events of the past few months, however, suggest that the ecosystem faces similar vulnerabilities and risks to those that can occur in traditional finance, including runs, excessive leverage, operational risk, opacity, and fraud.”

The report suggested that the Fed “[a]cting now to promote an appropriate regulatory environment for the digital assets ecosystem will help support responsible innovation while preserving financial stability.” The commentary also indicated that the main driver for crypto-asset prices appears to be “[s]peculation and risk appetite.”

The New York Fed devoted a fair amount of space to addressing stablecoins in particular. “Spillovers from runs on stablecoins represent the most salient financial stability risk [in the digital assets ecosystem], particularly for those stablecoins backed by traditional money market instruments,” they wrote. “Enforcing existing regulation, expanding the regulatory perimeter, and addressing regulatory gaps are essential.”

The report referenced the recommendations in the Financial Stability Oversight Council’s (FSOC) Report on Digital Asset Financial Stability Risks and Regulation from last month 2022 for guidance on how these gaps might be addressed.

The risk most cited by respondents in the latest report was that of persistent inflation, which pushed Russia’s invasion of Ukraine out of the number-one spot and into second place. Market liquidity strains and volatility, which did not make the top 10 in the spring report, moved all the way up to third in the fall survey, tied with higher energy prices.

Other areas of concern included a potential China–Taiwan conflict, under-regulated nonbank entities, and the threat of recession in Europe.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.