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The Basel Committee cautioned the global banking system that the growth of the decentralized currency industry could pose a serious risk to the economic and financial stability of the world.
Established in 1974 by the governors of the Group of Ten Central Banks, the Basel Committee on Banking Supervision [BCBS] concerns itself with the supervision of the world’s banking system. The committee keeps a regular check on the degree to which the world’s banks are exposed to the risk of volatile assets, in this case, digital assets.
In a March 13 statement, the committee stated that digital assets cannot be relied upon to replace the traditional structure of fiat currencies. Moreover, these assets are not a viable medium of exchange nor a store of value, according to the Basel Committee.
The report stated that the virtual currency industry posed a significant risk to the traditional financial world, primarily due to the volatile nature of the assets. Furthermore, threats related to liquidity, frauds, market manipulation, credit damage, money laundering, and terror financing were rampant in the crypto-industry.
However, the committee did admit that the banking world had “very limited” direct contact with the cryptocurrency industry. The committee went on to suggest that the crypto-industry should enhance its risk management protocols, to protect against its own volatility.
The statement read,
“The Committee is of the view that the continued growth of crypto-asset trading platforms and new [commercial] products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.”
On principle, cryptocurrency proponents do not want to merely compete with the global banking world, but want to replace them. Bitcoin [BTC], the top cryptocurrency in the market, was created as a mathematical-logical currency that was decentralized, and not under the power of one single issuing authority.
Government-issued fiat currency is seen as a product of the bureaucratic and financial elite, who aim to monopolize wealth. The crypto-industry aims to draw in more people to their movement, thereby replacing centralized, fiat currency.
Despite this principled belief, many see the cryptocurrency industry as any other investment vehicle, with higher volatility than most assets. Despite speculation and arbitrage not being the drivers of the crypto-industry, the committee seems to have viewed it that way.
It is this volatility, paired with unclear and uneven regulations of the industry, that have concerned the Basel Committee. Given cryptocurrencies’ fledgling status among stalwart investment fields, its surge in popularity, volatility, and lax-regulations, the Committee sees it as a direct threat to the stability of the global banking system.
The Basel Committee will be working closely with the Financial Stability Board to better manage the exposure risk of digital assets to other investment vehicles and the financial world, at large. The report concluded,
“The Committee will in due course clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets.”