- G20 finance ministers and central bankers are likely to embrace greater cryptocurrency regulation and reporting frameworks
- Cryptocurrencies not thought to pose any systemic risk at the moment, but that could change as it forms part of more portfolios
Since 2018, the clarion call for regulators to take a more serious look at cryptocurrencies has varied in volume, but with prices surging last year, the legion of newly-minted digital asset rich and depleted national coffers from the pandemic are forcing a more urgent look into the space.
Last week, Fidelity, one of the world’s largest asset managers revealed that US$331 million of cryptocurrency donations were received in 2021 by its charitable arm, a 12-fold increase over 2020 and some of that giving may not necessarily have come from the heart.
Tax optimization strategies to reduce capital gains tax on well-time cryptocurrency investments may also have been a motivation as investors wait for clarity from the U.S. Internal Revenue Service on the tax treatment of digital assets.
The issue has provoked rising angst among regulators, who are growing increasingly concerned that while cryptocurrencies remain a small sliver (almost a rounding error) in the world of global assets, they could soon reach a point where they threaten global financial stability (gasp).
A report by the Financial Stability Board (FSB), a global committee of regulators and central bankers and includes the European Central Bank, the U.S. Federal Reserve and the Bank of England noted,
“(Cryptocurrencies) are fast evolving and could reach a point where they represent a threat to global financial stability.”
The FSB is concerned about the ease with which cryptocurrencies can be used for money laundering and to obfuscate funds derived from nefarious activities, but the elephant in the room is stablecoins, cryptocurrencies backed by real assets such as dollars.
Although the market cap for stablecoins is still relatively small, at just US$155.6 billion, as more investors and institutions incorporate cryptocurrencies into their portfolio strategies, that significance could rise.
Stablecoins are the most common trading pair for cryptocurrencies, ahead of Bitcoin or Ether, which used to be well ahead of stablecoins.
Because stablecoins are not comprehensively regulated, the prospect of any one or more of them failing could ricochet into other cryptocurrencies, affecting investor portfolios and rippling into other asset classes where liquidations prove necessary to cover losses.
The FSB is aware of the dangers and G20 finance ministers and central bankers are likely to embrace the call for new data reporting requirements and other prudential controls – a move that should be welcome by cryptocurrency stakeholders.
With greater certainty comes greater participation, and while it may take time to implement proposed reforms, with global implementation necessarily uneven, at the very least global lawmakers and central bankers are finally sitting up to take notice of an asset class once dismissed and rubbished.
