The rise of crypto requires a global answer

If there was a principle that the G20 Minister of Finance, which the G20 finance ministers looked forward to at the meetings this weekend, united from inflation to climate change, then it would be that prevention would have made them all-and cheaper. The same applies to one of the most important issues of financial regulation: the determination of global rules for the management of cryptocurrencies. Perhaps that is why the finance ministers have cleverly included the conclusions of a report by the Financial Stability Board in the sector.

No significant changes in regulation have been announced. But the agreement of accelerating the surveillance and finding regulatory gaps that have to be filled are welcome first steps on the way to ensure that speculation in crypto remains an individual and no social risk.

The political decision -makers used to assume that crypto, although for a number of reasons it is problematic - including its potential to cheat on ordinary investors and washed the illegal profits from criminals - would not endanger the health of the financial system. This assumption may not be certain for long, since cryptocurrencies and related assets are becoming more and more a Mainstream. Problems in the markets for cryptocurrencies can increasingly "seep through" into the wider financial system - and endanger the stability of banks, other lenders and thus the overall economy. Tidying up after such a crisis will be more expensive than preventing it from the outset.

A survey published in June 2021 showed that hedge funds expect to significantly expand their stocks in so -called cryptoassets. Instruments that are coupled to cryptocurrencies such as derivatives will probably multiply: Many retailers use options to bet on the value of Bitcoin. Fidelity, one of the world's largest asset managers, launched a Bitcoin fund traded last week. The step of crypto from the shadow increases the risk that a severe drop in prices could shake confidence in important players, especially in those who have financed their commitment through borrowing.

The nightmare scenario would be a crypto version of the 2008 financial crisis. At that time, the uncertainty was sufficient for which institutes were suspended in a collapse of new financial titles to make the financial markets freeze. At the moment, however, there is no comparable "shadow banks" system that supports lending to the real economy with cryptoassets. Only a few would consider Bitcoin as a "safe asset", in contrast to the mortgage securities that were at the center of the 2008 crisis.

If anything is supposed to fulfill this role, then it is probably stable coins that make up a significant majority of the entire trade in cryptocurrency. These tokens should be completely convertible into ordinary currencies, usually the US dollar. With their apparent security and stability, this gives them many of the same properties as bank deposits - which are also to be converted into government -secured money on request. A sufficiently large shock for the cryptoma markets can lead to investors try to "redeem" their stable coins and behave as in a bank. This would force stablecoin providers to sell their assets to bring investors to their money. If this leads to an emergency sale, other markets could also be destabilized.

These risks are low for the time being. Krypto does not yet have the extent to tighten it. But the global financial world moves quickly. Therefore, the G20 is correct to get on the forefoot. In a world full of money, the opportunity for investors to exploit the speculative gains associated with crypto must remain a secondary priority for financial stability.