Crypto-assets

(CAs).

A crypto-asset is a virtual digital form of exchange based on cryptography and peer-to-peer networking, for example Bitcoin.

More commonly known as 'cryptocurrencies'.

Crypto-assets present significant risks for traditional markets

"Both DeFi and crypto-asset activity is taking place in markets generally with lack of the traditional safeguards around market integrity, consumer and investor protection and financial stability.

At the same time, increased interest in, and adoption of, digital assets by traditional financial sector players and institutional investors has been observed, coupled with increased supply of products and services providing access to crypto-asset risk.

Such ‘institutionalisation’ of crypto-assets could merit the attention of policy makers given that part of the activity is happening in a non-compliant manner or outside the perimeter of existing regulatory and supervisory frameworks, exposing participants and the markets to significant risks.

Institutionalisation of crypto-assets and DeFi-TradFi interconnectedness - OECD - May 2022.

Crypto-assets price collapse is plausible

"... a necessary thought experiment from a financial stability perspective is what would happen in the financial system if there was a massive collapse in the price of unbacked cryptoassets - at the extreme end, if the price fell to zero.

Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between cryptoassets, the cyber and operational vulnerabilities, and of course, the power of herd behaviour..."

Is 'crypto' a financial stability risk? - Bank of England - Jon Cunliffe, Deputy Governor, Financial Stability - October 2021.

European Central Bank (ECB)'s view on crypto-assets

"There is no universal definition of crypto-assets, but there is often some overlap between the commonly used terms, such as 'crypto-asset', 'crypto token', 'crypto currency' and 'virtual currency'. For the purpose of its analysis and assessment, the ECB Crypto-Assets Task Force defines a crypto-asset as 'a new type of asset recorded in digital form and enabled by the use of cryptography that is not and does not represent a financial claim on, or a liability of, any identifiable entity' ... their distinctive feature is the lack of an underlying claim, which makes them highly volatile and speculative...

"The Task Force’s analysis concludes that, at the moment, crypto-assets do not fulfil the three main functions of money, namely as a medium of exchange, a unit of account and a store of value. Their prices are still very volatile and they are not widely accepted by merchants as a means of payment. Consequently, they are not a credible substitute for cash and deposits.

Since the crypto-assets sector is still small, with very limited linkages to the wider financial system, crypto-assets neither entail significant implications for monetary policy, nor pose a material risk to financial stability in the euro area. Nevertheless, the sector requires continuous monitoring owing to its dynamics. It is important to be sufficiently prepared for a scenario in which the crypto-assets ecosystem could thrive and have an impact on the wider financial ecosystem."

ECB Crypto-Assets Task Force - May 2019.

Regulators' response to crypto-assets

"Even though their prospects of replacing fiat money are tenuous at best, cryptocurrencies are of growing interest to policymakers, many of whom prefer to term them crypto-assets expressly because they are not true currencies."

The Future of Money, March 2018 - Mark Carney, Governor of the Bank of England, speech to the Scottish Economics Conference.

EU watchdogs could treat cryptoassets as intangibles

"EU finance regulators may find it necessary to classify cryptoassets as intangibles for prudential reasons, according to a new paper from the European Central Bank (ECB).

Published on 17 May, the paper has stemmed from a detailed and thorough investigation of novel financial products by the ECB’s Internal Crypto-Assets Task Force (ICA-TF).

In its analysis of risks and regulatory gaps, the paper points out that 'incipient, yet growing' crypto-brokerage and post-trade services for institutional investors may lead to increased exposures.

However, it says: 'Currently, the means to address these potential risks from a prudential perspective are lacking. There is no identified prudential treatment for cryptoasset exposures of financial institutions, whether direct investments, derivatives, or indirect investments.' Indeed, it stresses, clarifying the optimal accounting treatment for cryptoassets could lead to 'a more conducive environment' for the creation of such investments...

As such, the paper suggests, classifying cryptoassets as intangibles under IAS 38 would automatically mean they would be deducted prudentially. It notes: 'Accounting standard setting bodies/authorities could pursue a harmonised accounting treatment by prescribing that banks should account for cryptoassets as intangible assets. Other accounting treatments (for example, cash, FX position or commodities) would result in alternative prudential treatments under the market risk framework of the Capital Requirements Regulation that are not fully suited to capture the volatility of cryptoassets.'"

The Treasurer - News roundup online exclusive - June 2019.

Also written cryptoassets.

See also

• Altcoin
• Bitcoin
• Blockchain
• Capital Requirements Regulation
• Central bank digital currency (CBDC)
• Crypto-asset service provider (CASP)
• Cryptocurrency
• Crypto-derivative
• Decentralised finance (DeFi)
• Derivative instrument
• Euro area
• European Central Bank (ECB)
• Fiat currency
• Financial stability
• Gold standard
• IAS 38
• Institutionalisation
• Intangible assets
• Internal Crypto-Assets Task Force
• Monetary policy
• Money
• Organisation for Economic Co-operation and Development (OECD)
• Prudential
• Ripple
• Token
• TradFi
• Volatility

Other resources

• Institutionalisation of crypto-assets and DeFi-TradFi interconnectedness - OECD - May 2022

• Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures, May 2019, ECB Report