Supervisory authorities are targeting cryptocurrencies

When the prices for cryptocurrencies skyrocketed last year, hordes of newly baked digital millionaires created this. Now we see some real consequences.

This week the asset manager Fidelity announced that his customers in 2021 10 billion. This was a 12-fold increase compared to 2020.

Some of these donations could have reflected mere generosity (or feelings of guilt). But preventive "tax optimization" strategies have probably also triggered it, since investors are waiting for "clarity of the domestic Revenue services about what the crypto taxation will look like in the future," says Stephen Pruitt, head of Fidelity Charitible.

In any case, the pattern shows that the once anarchic crypto world, directed against the establishment, is increasingly mixing with the sober sphere of tax planning and cumbersome mainstream financial companies. Is that a good thing? Many fidelity investors (and the charity organizations they targeted) would say "yes". But with the regulatory authorities, the topic caused growing fear this week in the run-up to the meeting of the G20 heads of state and government.

to understand why, take a look at an important report that the Financial Stability Board, a global committee of regulatory authorities and central bankers, published before the G20.

The report states that the crypto world has not yet been a systemic financial risk. Because although its market capitalization has more than tripled in 2021 and has reached $ 2.6 trillion, "this remains [S] a small part of the entire assets of the global financial system". And "episodes of price volatility" were "previously contained in the markets for crypto facilities and had not spread to financial markets and infrastructures". Phew.

But the FSB report shows that the regulatory authorities fear that this positive image begins to change. "Markets for crypto systems," she warns, "develop quickly and could reach a point where they represent a threat to global financial stability."

What worries the FSB can be summarized in four L words: legality, leverage, liquidity and leakage.

The first of them is relatively easy to describe: the pseudonyms, limitless nature of crypto made it a breeding ground for money laundering and other shameful practices. This week, for example, a crypto research group called Chainalysis proposed that criminals had crypto worth $ 11 billion from known illegal sources in 2021-a quadruple compared to 2020.

However,

leakage is a more subtle problem. Until recently, most FSB supervisory authorities and central banks seemed to compare crypto-assets with poker chips in a digital casino-that is, token that regularly triggered wild dramas at the betting table, but did not have a big influence on the "real" world outside of the casinos, since they could not be used outdoors without conversion.

But the FSB now assumes that contagion or leakage risks increase. One reason for this is that the output of so-called stable coins-crypto tokens, which are covered by real assets such as dollars-rose from USD $ 5.7 billion to $ 155.6 billion in January.

Another reason is that established investors and institutions now integrate crypto into more comprehensive portfolio strategies. This means that every future crypto prices crash on other asset classes could bounce off if investors had to liquidate portfolios.

The other two “LS”, leverage and liquidity incongruencies could further tighten such vibrations. The latter are a problem because the cyber companies that spend stable coins may not have enough liquid funds to actually redeem the claims of investors, the FSB states. This creates the risk of Runs, as we have often seen in the banking world (and experienced with loan vehicles during the financial crisis in 2008).

Meanwhile, the Leverage problem arouses cause for concern, since anecdotal evidence is that debt is increasingly being used to accelerate crypto bets. To give just one example: FTX trading, a crypto company, recently noted Bitcoin products with 20-fold leverage on the Austrian stock exchange. And while the anecdotal evidence also indicates that the leverage has recently decreased in accordance with the Bitcoin price, this "L" word triggers a Pawlow reaction of the supervisory authorities in view of the role that the hidden leverage played in 2008.

Of course, crypto enthusiasts would argue that the concern about crypto in the face of all the other lever problems that the FSB sometimes played down appears a little ironic. Fair point: Many mainstream finance classes are interspersed with leverage and potential liquidity incongruencies due to years of excessively relaxed monetary policy. A crash of treasury prices would be more destabilized than one at Bitcoin.

Regardless of whether you have to understand the concerns of the FSB or not, the crucial point that investors have to understand is as follows: regulatory control increases - quickly. In fact, the G20 will probably accept the FSB's claims for new data reporting requirements and other supervisory controls.

And although it could take some time to implement these proposed reforms (and the global implementation will inevitably be uneven), these would-be crypto millionaires must be prepared for a new world. In other words, in 2022 we will hear much more about crypto tax planning; Not every "charity" is purely charitable.

gillian.tet@ft.com